Investment Clock insights

Another welcome delay in Japan's sales tax hike?


Trevor Greetham

3 March 2016

Japanese Prime Minister Abe needs to decide soon whether to go ahead with the consumption tax hike from 8% to 10% scheduled for April 2017. This has already been delayed by 18 months, rightly in our view, from October 2015 in order to give the economy more time to recover. Another delay is politically difficult for Abe but what attracts us to Abenomics as investors is the all-out assault on deflation which has always sat poorly with a tightening of fiscal policy.

Abe has remained adamant that the hike will go through, absent of Lehman-type global shock, but he could use 'international policy coordination' as an excuse to delay the sales tax hike or supplement it with an offsetting large fiscal package. G20 ministers meeting at the weekend agreed to use "all policy tools – monetary, fiscal and structural – individually and collectively" to reach the group's economic goals. We expect such tone to be carried through to the G7 meeting, which Japan hosts in May.

Japanese equities have underperformed the global market lately but we think this was caused by temporary currency movements against the longer-term trend. Some yen strength has been due to the pricing out of US Federal Reserve rate hike expectations; some is most likely temporary and to do with risk aversion and a repatriation of overseas capital to Japan.

We expect the yen to weaken from here as the market gradually factors US interest rate hikes back in again and the Bank of Japan eases policy further. Renewed dollar strength would be positive for Japan versus the emerging markets, one of our key positions.

Chart: US dollar index and Japanese vs emerging market stocks

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.