8 Aug 2013
Japan: Incremental approach to sales tax may lead to further Yen buying
FXstreet.com (Barcelona) - Nikkei news is running a story suggesting that Japan's Prime Minister Mr. Abe may be weighing the possibility of implementing a sales tax hike but in increments of 1%.
If confirmed, the fiscal adjustment would become a more gradual process by avoiding a sudden 3% increase as previously planned - from 5% to 8% in April 2014 -, which still has some vocal skeptics among Japanese policymakers on logical fears that the economy may slowdown.
Recently appointed as key economic adviser to Mr. Abe, Yale University Professor Mr. Koichi Hamada, has been promoting a more incremental approach to the sales tax increase, also calling for further BOJ easing if sales tax hurts the economy.
What does small increments in sales tax mean for the Yen?
The sales tax has been logically associated with less consumption, which leads to stagnancy in growth and less potential to generate inflation. As a result, to simplify, the tax increase suggests the BoJ will have to use the option of further easing in order to keep stimulating a self-sustaining economic recovery, while working on the case for a 2% inflation mandate.
We have been previously covering what a tax increase means for the Yen in an article published July 30 and July 28.
However, this time there is a kicker as market is now starting to speculate on a sequence of 1% by 1% sales tax increases, to be implemented progressively, as to more easily absorb the impact that fiscal adjustments may have on consumers. Amid such possible scenario, the market appears to be pricing smaller odds for the need of more easing by the BoJ in the immediate future.
According to Adam Button, Chief Editor at Forexlive: "One way to maintain confidence in debt market, reduce deficits and trim the shock of a sharp tax increase would be to spread it out. The Nikkei report suggesting tax increases in 1% increments could be a part of that because they give the government more flexibility to back down."
If the 1% increments are approved, the Yen may enjoy further strength as the market see that as a temporary formula allowing the economy to continuously grow while not being that badly hurt by the tax hike, which leads to the belief of no additional easing by the BoJ necessary unless signs of a significant slowdown emergence.
If confirmed, the fiscal adjustment would become a more gradual process by avoiding a sudden 3% increase as previously planned - from 5% to 8% in April 2014 -, which still has some vocal skeptics among Japanese policymakers on logical fears that the economy may slowdown.
Recently appointed as key economic adviser to Mr. Abe, Yale University Professor Mr. Koichi Hamada, has been promoting a more incremental approach to the sales tax increase, also calling for further BOJ easing if sales tax hurts the economy.
What does small increments in sales tax mean for the Yen?
The sales tax has been logically associated with less consumption, which leads to stagnancy in growth and less potential to generate inflation. As a result, to simplify, the tax increase suggests the BoJ will have to use the option of further easing in order to keep stimulating a self-sustaining economic recovery, while working on the case for a 2% inflation mandate.
We have been previously covering what a tax increase means for the Yen in an article published July 30 and July 28.
However, this time there is a kicker as market is now starting to speculate on a sequence of 1% by 1% sales tax increases, to be implemented progressively, as to more easily absorb the impact that fiscal adjustments may have on consumers. Amid such possible scenario, the market appears to be pricing smaller odds for the need of more easing by the BoJ in the immediate future.
According to Adam Button, Chief Editor at Forexlive: "One way to maintain confidence in debt market, reduce deficits and trim the shock of a sharp tax increase would be to spread it out. The Nikkei report suggesting tax increases in 1% increments could be a part of that because they give the government more flexibility to back down."
If the 1% increments are approved, the Yen may enjoy further strength as the market see that as a temporary formula allowing the economy to continuously grow while not being that badly hurt by the tax hike, which leads to the belief of no additional easing by the BoJ necessary unless signs of a significant slowdown emergence.