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Have investors been too harsh on Japan?

The stock market darling of 2013 has lost some of its luster this year, but according to Capital Economics, investors are being too harsh on Japan.

After standout gains of 55 percent last year, sentiment appeared to shift at the start of 2014 with the Nikkei 225 becoming the worst performing Asia Pacific market in the first quarter. The index did recover some of its losses this week on yen weakness, hitting a one-month high on Thursday, but is still down more than 7 percent year to date.

Read MoreNo better time to hike sales tax: Mr Yen

Worries over the impact of Japan's consumption tax hike – which was implemented on April 1 –have shaken market sentiment as investors fret over how higher taxes will dent discretionary spending at a time when the economy's starting to gain traction.

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