This Week’s Tax Debate in Japan’s Diet Could Move Markets

Japanese stocks have had a good run so far this year.  But whether the good times continue–both for stocks and bonds–depends critically on whether the faction-riven Democratic Party of Japan (DPJ), under the embattled leadership of Prime Minister Noda Yoshihiko, comes up with a credible (and eventually passable) consumption tax increase bill as scheduled this week.

If not, the bearish scenario is that Japan’s bond market will continue heading down, and pull stocks with it.  This scenario has been given a name:  “Ozawa shock.”

Since hitting a low of 8,160 last November 11, the Nikkei 225 Index is up a whopping 23%.  But last Friday’s 10,011 close was off 115 yen (1.14%) from the day before, the second biggest drop of the year.

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Stocks in Japan Open Lower

Stocks in Japan traded lower Thursday on the heels of a wild day of U.S. trading that ended in a 4%-plus drop for U.S. markets.

The Nikkei (N225) was down 1.3% at the end of its morning trading session, rebounding a bit after opening with a loss of nearly 2%. Stocks in Hong Kong also opened lower, with the Hang Seng (HSI) index dropping 1.2% in early trading.

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Japan’s Nikkei higher on G7 currency pledge

Japan’s stocks posted solid morning gains Friday after the Group of Seven major industrial nations agreed to intervene in currency markets to help the earthquake-stricken nation.

The benchmark Nikkei 225 rose 1.8 percent, or 158.26 points, to 9,120.93. While the G-7 did not say what it would do, the implication is that actions were under way to ensure the yen does not spiral upward.

The Kyodo News agency said Japan’s government intervened in currency markets after the G7 statement but there was no immediate official confirmation of that.

A stronger yen hurts Japan’s powerhouse export sector — potentially dealing another problem to an economy already wracked by an earthquake, tsunami and evolving nuclear crisis.

The G-7 pledge adds to a flurry of moves by Japan to calm roiled financial markets following the 9.0-magnitude quake and tsunami on March 11. The Bank of Japan injected an additional 6 trillion yen ($76.7 billion) in same-day funds Thursday that banks can access immediately. From Monday to Wednesday, the central bank’s emergency funding totaled 55.6 trillion yen ($688.3 billion).

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Japan central bank injects $184B as stocks dive

Japan’s central bank is injecting a record 15 trillion yen ($183.8 billion) into money markets, while the Tokyo stock market nosedived Monday on the first business day since an earthquake and tsunami devastated the country’s northeast and raised dire worries about the economy.

The benchmark Nikkei 225 stock average plunged about 641 points, or 6.3 percent, to 9,612.88, extending losses from Friday. The earthquake hit shortly before markets closed for the weekend.

Worries about the economic impact of the disaster triggered a plunge that hit all sectors. The broader Topix index was down more than percent. Shares of several major companies were overwhelmed with sell orders and had yet to trade.

Among those, the Tokyo Electric Power Co. was set to fall by double digits as it faced power shortages and second hydrogen explosion at a nuclear reactor Monday, sending a massive column of smoke into the air and wounding six workers. Toyota Motor Corp., the world’s biggest automaker, tumbled 7.4 percent.

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