Abe Gets Ammunition for Sales-Tax Boost Ahead of G-20 Meet
Comment of the Day

September 02 2013

Commentary by Eoin Treacy

Abe Gets Ammunition for Sales-Tax Boost Ahead of G-20 Meet

This article by Takashi Hirokawa and Norihiko Kosaka for Bloomberg may be of interest to subscribers. Here is a section
Japanese Prime Minister Shinzo Abe got ammunition to raise a sales tax, as capital-spending data pointed to faster economic growth than initially estimated and government panels backed an increased levy.

JPMorgan Chase & Co. and UBS AG said second-quarter gross domestic product may be revised up after investment data released today. A majority of those in seven consultative panels favored proceeding with the sales-tax increase, while also urging stimulus to offset the blow to consumption, Economy Minister Akira Amari told reporters Aug. 31 in Tokyo.

The consultation exercise and signs of strength in the economy may help Abe justify raising the sales tax to 8 percentin April from 5 percent now. While the move would shore up Japan's finances -- a topic Japan is set to discuss at a Group of 20 nations meeting in St. Petersburg, Russia, this week -- the blow to consumption could return the economy to contraction.

“We're only two quarters into Abenomics and I'm a little anxious that a sales-tax increase is going to undermine the process,” said Tim Condon, head of Asia research at ING Groep NV in Singapore. He said that the government is more likely than not to proceed with the move.

Eoin Treacy's view At the time of the Upper House election in June, there was a great deal of speculation about whether Mr Abe would be able to follow through on his promise to reform when vested interests within his own party made their voices heard once a favourable result was achieved. In the months since, investors have been waiting to see whether a willingness to implement a necessary hike to VAT rates would materialise. Without it the measures taken to inflate Japan's economy could prove destabilising considering Japan has the highest debt to GDP ratio in the developed world.

The US Dollar has been ranging between ¥95 and ¥105 since June and has been firming above ¥95 since mid-August. This multi-month process of consolidation follows an explosive breakdown by the Yen earlier this year and coincides with the questioning of how committed the Japanese administration is to reform. A sustained move below ¥95 would be required to begin to question medium-term scope for continued Yen weakness.

The Nikkei-225 Index also entered a predictable process of consolidation following its explosive breakout and has unwound its oversold condition relative to the 200-day MA. A sustained move above 13,800 would break the progression of lower rally highs and suggest a return to demand dominance. The Topix Banks Index has a similar pattern.

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