31 Jul 2013
Evidence mounts Japan to hike sales tax; BoJ easing for longer?
FXstreet.com (Barcelona) - Japan's Finance Minister Taro Aso reiterated on Tuesday the necessary steps to be taken if the country is to fix its fiscal problem as the government debt continues to increase.
The BoJ is systematically engaging in monthly purchases of local bonds, at the same time, Japan is trying to create a self-sustaining recovery, an arduous task, with the puzzles getting even more complex if one throws into the mix a promised mandate for stricter fiscal discipline, which includes a sales tax hike next April 2014.
Evidence mounts tax hike might be forthcoming
"It is extremely important to push ahead with fiscal reform while pursuing the goal of revitalizing the Japanese economy at the same time; while making efforts to defeat long-running deflation, Japan needs to revamp its finances to make them sustainable on a long-term basis" Finance Minister Taro Aso said, cited by Mitsuru Obe from WSJ.
"To achieve these goals--which are international commitments for Japan--the government will draw up a medium-term fiscal reform road map this summer," the speech said.
Aso also emphasized that "it's ultimately the premier's decision, but I don't think we have an option not to hike the sales tax rate, unless there is an extraordinary shock from overseas similar to the Lehman shock."
Japan's PM Mr. Abe is set to make a final decision on the controversial tax increase by September or October the latest, with the decision directly associated with the state of economic affairs. There has been reports recently confirming that Abe plans to set-up an external committee to assess the different economic scenarios if a sales tax hike were to be implemented, as fears are still high about whether or not the economy may withstand possible lower consumption on a tax hike.
One of the latest headlines from Asahi News just read "Japan to cut budget deficit by 8T yen over the next 2 years" without further details on the matter. According to Eamonn Sheridan, Editor at Forexlive, "I find it difficult to believe – unless this is some projection from the possible sales tax increase." What this headline suggests, especially coming from a Japanese-based top-tier news outlet is that the assumption that the tax will be established is growing.
What does a tax hike mean for the Yen?
If the tax hike is taken forward, what would this mean for the Yen? If Japan decides to hike the planned sales tax, odds are higher for downward pressure in inflation, as the tax poses risk for lower spending & sentiment, leading to stagnant wage levels.
In a report published earlier on the week, where contrarian rumours about a suppression of the tax hike were heard, we discussed the Yen performance as a proxy of the perception of future monetary policies by the Bank of Japan.
We argued that "if the sales tax increase were to be watered down, seems logical to assume that Japan's alleged inflationary cycle may pick up further momentum, which overtime, if the tendency indicates that the 2% price target is on track, it may suggest that a possible exit strategy from 'ultra loose' policies by the BoJ may be considered." By the same token, if the tax hike were to be implemented, chances are that inflation might be harder to achieve, thus the Bank of Japan having to potentially play an aggressive easing role for longer to hit the 2% sustainable inflation goal.
The BoJ is systematically engaging in monthly purchases of local bonds, at the same time, Japan is trying to create a self-sustaining recovery, an arduous task, with the puzzles getting even more complex if one throws into the mix a promised mandate for stricter fiscal discipline, which includes a sales tax hike next April 2014.
Evidence mounts tax hike might be forthcoming
"It is extremely important to push ahead with fiscal reform while pursuing the goal of revitalizing the Japanese economy at the same time; while making efforts to defeat long-running deflation, Japan needs to revamp its finances to make them sustainable on a long-term basis" Finance Minister Taro Aso said, cited by Mitsuru Obe from WSJ.
"To achieve these goals--which are international commitments for Japan--the government will draw up a medium-term fiscal reform road map this summer," the speech said.
Aso also emphasized that "it's ultimately the premier's decision, but I don't think we have an option not to hike the sales tax rate, unless there is an extraordinary shock from overseas similar to the Lehman shock."
Japan's PM Mr. Abe is set to make a final decision on the controversial tax increase by September or October the latest, with the decision directly associated with the state of economic affairs. There has been reports recently confirming that Abe plans to set-up an external committee to assess the different economic scenarios if a sales tax hike were to be implemented, as fears are still high about whether or not the economy may withstand possible lower consumption on a tax hike.
One of the latest headlines from Asahi News just read "Japan to cut budget deficit by 8T yen over the next 2 years" without further details on the matter. According to Eamonn Sheridan, Editor at Forexlive, "I find it difficult to believe – unless this is some projection from the possible sales tax increase." What this headline suggests, especially coming from a Japanese-based top-tier news outlet is that the assumption that the tax will be established is growing.
What does a tax hike mean for the Yen?
If the tax hike is taken forward, what would this mean for the Yen? If Japan decides to hike the planned sales tax, odds are higher for downward pressure in inflation, as the tax poses risk for lower spending & sentiment, leading to stagnant wage levels.
In a report published earlier on the week, where contrarian rumours about a suppression of the tax hike were heard, we discussed the Yen performance as a proxy of the perception of future monetary policies by the Bank of Japan.
We argued that "if the sales tax increase were to be watered down, seems logical to assume that Japan's alleged inflationary cycle may pick up further momentum, which overtime, if the tendency indicates that the 2% price target is on track, it may suggest that a possible exit strategy from 'ultra loose' policies by the BoJ may be considered." By the same token, if the tax hike were to be implemented, chances are that inflation might be harder to achieve, thus the Bank of Japan having to potentially play an aggressive easing role for longer to hit the 2% sustainable inflation goal.