Equity market slump unlikely to derail the recovery

January’s sell-off in the equity market and the strengthening yen are unlikely to have much impact on the Japanese economy. Equities have regained some ground over the past week and the Nikkei is still much higher than before Abenomics began. In any case, with direct holdings of equities by households small, the impact of any price falls on consumption should be limited. More important perhaps is the stronger yen, as it points to lower inflation in coming months, and thus increases the chances of additional easing by the Bank of Japan. Indeed, forward-looking business surveys suggest that the current strength in the economy is unlikely to last beyond April’s consumption tax hike, bolstering the case for more monetary stimulus.