Currency Analyst since 2010

JPY: what a delay in tax hike would mean

There’s a speculation that Prime Minister Shinzo Abe will postpone the second sales tax hike to avoid damaging a fragile economic recovery.

Abe is expected to make the decision on the tax increase after Japanese Q3 GDP figures come out on Monday. The dominating view is that the nation’s economy remains shaky after the first sale tax increase in April.

If the second rate hike is delayed, this will be a short-term positive factor for Japanese stock market and, consequently, for USD/JPY. In the longer run, however, the picture will be less optimistic: the sales tax increase was aimed to fund rising social security costs and curb Japan’s massive debt, so its delay will worsen the nation’s fiscal discipline. In addition, opposition politicians say delaying the tax hike would show that his “Abenomics” growth strategy based on a mix of hyper-easy monetary policy, spending and reforms has failed.

Japanese press is also actively suggesting that Abe will dissolve the parliament and call for a snap elections. The Prime Minister has reasons to do that: his party is well supported, but his approval ratings are slowly declining. If there are new elections, Abe’s Liberal Democratic Party will and Abe will be able to renew his mandate for another 4 years. This would allow him to take more time to conduct a series of unpopular steps such as a tax hike.

Nomura clarifies that the possible timings of a snap election by year-end are Dec. 14, 21, and 28. To call a snap election on Dec. 14 or 21, Abe needs to dissolve the parliament by Nov. 30 when the current session is scheduled to end. “Even though the election outcome always carries risk, a snap election result is more likely to be positive for Japanese equity and USD/JPY,” concludes Nomura.

As long as there are no decisions on the snap elections and the tax hike, USD/JPY may find itself under pressure because of political uncertainty with investors reducing bullish positions.

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