Derek Halpenny, European Head of GMR at MUFG, notes that the PM Abe spoke in the Diet today and was clear that the government was not considering postponing the planned sales tax increase from 8% to 10% scheduled for April 2017, arguing that economic fundamentals were “sound” and that the best way to support growth was to address the fiscal situation. Key Quotes “But economic data being released would certainly question whether that view of the economy is accurate. Today’s consumer spending data did show a rebound with overall real household spending increasing 1.2% y/y after recording a 3.1% drop in January. However, the rebound was supported by the leap-year boost to growth while other temporary factors also provided some support for spending. The quarterly Tankan report is due on Friday and the consensus there is for the report to show a worsening of business sentiment – a drop to the market consensus of +8 for large manufacturers would be the worst reading since June 2013. USD/JPY continues to grind gradually higher into fiscal year-end with no major theme driving the yen. Tomorrow’s spot value will be for the new fiscal year and we suspect that broader financial market conditions may well be conducive to a pick-up in investor outflows on an unhedged basis. The broader mix of global financial market conditions are a bit more favourable with equity markets more stable and emerging markets in particular less volatile. If short-term yields were to drift higher in the US without trigger renewed market volatility that would be conducive for a period of yen selling versus the dollar. The upturn in crude oil prices is also a positive for USD/JPY. Higher crude oil will at the margin erode Japan’s large current account surplus while also providing a lift to inflation that will help bring down real yields.” For more information, read our latest forex news.