Japan's economy, especially domestic spending, has been in the doldrums since the government raised sales tax by 2 points to 5 per cent in April. A tax cut would help, but Taku Yamasaki, chairman of the Liberal Democratic Party's policy research council, said a cut was impossible if it required the sale of deficit-covering bonds. However, opposition politicians may force the LDP's hand. The LDP will release an economic stimulus plan around 20 October.
Investor concern over an apparent lack of government concern over economic weakness was a major factor in pulling the Nikkei stock index down nearly 2.5 per cent last week to an eight-month low of 17,376.92.
"The trend is still down," said Chuck Lambert, a market analyst at Jardine Fleming Securities (Asia). "I think we are reaching a delicate level where if we cannot hold here then we go plummeting to the lows of 1992 or 1995." In 1995 the Nikkei fell close to 14,500. Analysts believe the index will trade between 17,000 and 17,500 next week.
The underlying weakness in Tokyo makes it more vulnerable to influence from New York. On Thursday the Nikkei fell 1.37 per cent on the back of a 1 per cent drop in the Dow on Wednesday. Weakness in US markets can bode ill for Japan's global companies, whose stocks often move in tandem with Wall Street.
Another possible drag on the prices of blue-chip stocks is friction at the US-Japan car market talks in San Francisco. The negotiations are slated to continue through most of the week. The US has accused Japanese car makers of using exports to offset sluggish domestic sales and not promoting imports. "Japan is not fulfilling its promise to achieve strong, domestic-led growth," said Mr Lambert. "The US might decide that enough is enough." But he added there was some room for a rise in stock prices next week, especially if the Japanese government came out with a plan for cutting taxes.
Economic indicators released next week aren't expected to influence bonds greatly as the decline in consumer spending and production after the April tax increase is mostly discounted.