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Japanese Stimulus Expectations Rise Amid IMF Criticism

NEW YORK (TheStreet) -- The Bank of Japan may introduce new stimulus at its policy meeting this Wednesday, analysts said, amid fresh criticism from the International Monetary Fund over the nation's attempt at structural reform.

While many fund managers expect the Bank of Japan to wait until it can assess the impact of a higher consumption tax on growth, some said the central bank will act soon.

The IMF on Monday warned that growth in China and Japan could fall below expectations, with negative impacts for the region.

"Abenomics could be less effective than envisaged, resulting in lower inflation and weaker growth, with spillovers to economies that have strong trade and foreign direct investment linkages with Japan," the IMF said. "Without additional reforms, Japan risks falling back into lower growth and deflation, a further deterioration in the fiscal situation, and an over-reliance on monetary stimulus."

Abenomics -- a package of monetary, fiscal and structural reforms introduced by Prime Minister Shinzo Abe -- aims to pull Japan out of decades of deflation. It bolstered Japanese shares in 2013 as a massive stimulus program was implemented, though the success of structural reform is yet to be seen.

The body described Asia as the most dynamic region of the global economy, but said reforms were needed to secure financial stability and sustain growth.

While there is widespread cynicism over the likely success of structural reform in Japan, pundits are split over whether this means an ongoing dive for Japanese shares in 2014. The Nikkei has shed 10% for the year to date after leaping 52% in 2013.

Some suggest that even partial success in the structural reform agenda will be sufficient to boost shares, while many expect further stimulus to renew investor confidence given valuations in Japan remain attractive. Nomura strategists suggested Japanese shares will benefit from better U.S. data, which should strengthen the greenback against the yen, and in turn boost the Nikkei.

Others pointed to the prospect of more stimulus. Societe Generale analysts said they expect additional easing at the BOJ's policy meeting on Wednesday, predicting four criteria for more QE will be met. These include inflation remaining below the BOJ's target, broad expectations for more monetary easing, a downward revision in the central bank's growth forecasts, and general concern over the economic outlook given new pressures, such as the consumption tax rise from 5 to 8% this month.

The BOJ will publish new economic and inflation outlooks on Wednesday, with expectations the BOJ will lower forecasts: the central bank's 2013 economic growth estimates are 2.7% vs. consensus of 2.3%, while it forecasts 1.4% economic growth for fiscal 2014 ahead of 0.7% consensus estimates.

Societe Generale said the BOJ's additional measures would likely see an additional 10 trillion yen hike to the monetary base from 60 trillion to 70 trillion yen to between 70 trillion to 80 trillion yen per year.

This would involve more money for risk assets purchases, fund-provisioning measures to stimulate bank lending, and the purchase of more Japanese Government Bonds, with the average duration of JGBs likely raised from seven to eight years.

"In case the BOJ does not implement additional measures, the effect of policies to change inflation expectations will be weakened," the French bank warned.

The Nikkei closed 0.98% lower on Monday, its steepest fall in a fortnight.

-- By Jane Searle

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