Salient to Investors:

Gary Dugan at Coutts & Co. said the stronger yen is probably the main driver of the bigger declines in Japanese stocks, and investors are locking in profits as they back away from equities. Coutts said the yen halted its slide and started to strengthen, potentially curbing company profits.

Sumitomo Mitsui Asset Mgmt said a sales tax increase for April will damp consumer spending.

Tetsuo Seshimo at Saison Asset Mgmt said Japan’s market finally came to its senses after investors ignored risk too much toward the end of last year and the market was out of balance.

Economists say an increase in Japan’s sales tax to 8 percent from 5 percent in April will trigger a 4.1 percent annualized contraction in Q2 and test the resilience of the growth recovery.

Peter Elston at Aberdeen Asset Mgmt said reigniting animal spirits and implementing structural reforms in Japan won’t be easy, and given that Japan had performed so well in 2013, there is a greater scope for the market to fall.

Makoto Kikuchi at Myojo Asset Mgmt said the Nikkei 225 will tumble to 9,000 by year-end as gains in taxes, living costs squeeze consumers and a slowdown in emerging markets cause an unexpected 20 percent decline in corporate earnings for Nikkei 225 companies in the 12 months ending March 2015.

Matthew Sherwood at Perpetual has turned negative on Japan and said investors need to see a follow-through in earnings before the market can add more to already substantial gains.

Sakthi Siva at Credit Suisse said the momentum of earnings upgrades in Japan is ebbing and the relative attractiveness of Japan is diminishing – our biggest concern is it is a crowded trade.

Overseas investors bought a net 15.1 trillion yen in Japanese shares in 2013, the largest amount figures began in 1982.

The Topix is at 14.4 times estimated earnings versus 15.2 for the S&P 500.

Takuya Takahashi at Daiwa Securities said the Japanese stock rout is overdone because  overall, earnings will see double-digit growth. He said stimulus tapering in sync with the US economic recovery should give confidence to the market.

Masaru Hamasaki at Sumitomo Mitsui Asset Mgmt said the impact of the sales-tax increase will weigh on the market and keep shares from reaching a new high – there is limited room for Japanese shares to rally from here.

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