FXStreet (Bali) - Yujiro Goto, FX Strategists at Nomura, reviews the final draft of Japan's updated growth strategy, published yesterday, noting that the draft exceeds epectations.

Key Quotes

"Our economists judge that the draft exceeds market expectations in some areas, such as labour market and agricultural reform. Prime Minister Abe's speech on the growth strategy last year sent USDJPY and Japanese equity lower, but the FX market reaction to yesterday‟s announcement has been muted so far. The growth strategy is likely to be approved by the cabinet on 27 June, but the final draft did not disappoint expectations for JPY weakness, even though speculative JPY positions have been re-accumulated over the past month."

"In the FX market, corporate tax reform and GPIF reform are two major topics. Last Friday Prime Minister Abe announced that the corporate tax rate would be reduced to below 30% in the next few years so yesterday‟s update delivered no surprises. The statement without a specific timeframe suggests more discussion on corporate tax reform, especially about the pace of tax cuts and sources of alternative funding, will be needed between the pro-growth camp and the fiscal consolidation camp by year-end."

"The discussion may be linked with the final decision on the second consumption tax hike, which is currently scheduled for October 2015, and the fiscal consolidation camp may need to compromise to enable the consumption tax hike to go ahead. Thus, the corporate tax cut debate could end with a more pro-growth result."

"In terms of GPIF reform, the strategy update suggests the GPIF should review its portfolio management quickly, and its governance structure must be strengthened. As expected, the strategy does not specify the desirable portfolio, but the GPIF is likely to announce its new target portfolio in Q3, with around a 40% domestic bond share (currently 60%)."

"Discussion of the GPIF reform will continue into Q3, and corporate tax reform plans will be discussed throughout H2 this year, which should be positive for USDJPY."