The Threat of 'Abegeddon' From Taxes in Japan
Posterity is watching carefully as Shinzo Abe goes ahead with a sales-tax increase aimed at getting a handle on Japan's huge debt burden, the world's largest. Unfortunately history may judge him no better than Ryutaro Hashimoto, the last Japanese prime minister to kill an economic recovery with ill-timed fiscal tightening.
That's not the conventional wisdom of the moment. Markets are euphoric over surging confidence among large Japanese manufacturers. September's jump in the quarterly Tankan (JNTSMFG) index -- to the highest levels since before the Lehman Brothers Holdings Inc. collapse in 2008 -- gave Abe just the tail wind he needed to raise the consumption tax to 8 percent from 5 percent starting in April 2014, with a further 2 percent increase in the cards for 2015.
Yet Abe is ignoring two things that could end his revival program, dubbed Abenomics: the precedent set by Hashimoto, Japan's 53rd prime minister, and the specter of inflation.
Hashimoto's 1997 sales-tax increase scuttled Japan's best chance at strong growth in a decade. By the time Hashimoto left office in 1998, business leaders were deriding him as Japan's Herbert Hoover, the 31st president who botched the U.S. exit from the Great Depression with badly timed austerity measures.
Inflation heightens the risk Abe is making the same mistake. The government hailed news last week that consumer prices are rising at the fastest pace since 2008 as a vindication of Abenomics. Yet the 0.8 percent jump in prices excluding fresh food in August was purely an energy story, driving by a surge in costs for fuel imports.
David Fuller's view All of William Pesek's remarks in the column
above are relevant and no one ever thought that the challenge of reinvigorating
Japan's economy was going to be easy. After all, there is the enormous government
debt and the national loss of confidence over the last 25 years. The Fukushima
disaster in 2011 has compounded Japan's energy problems and the global economy
Nevertheless, Shinzo Abe and his colleagues are experts on what has not worked for Japan during the last quarter of a century. They know that they have to be sufficiently bold to rekindle the entrepreneurial spirit in Japan. They also know that they have to be responsible, to keep the IMF on side and avoid credit downgrades. They probably need to be lucky as well, and they could do with more than moral support from their powerful and largely energy independent ally, the USA.
Meanwhile, from an investment perspective I would continue to give Japan the benefit of the doubt, at least while the technical picture remains favourable. Japanese equities are not expensive and the technical action for the Nikkei 225 (weekly & daily) continues to resemble a lengthy medium-term consolidation above the large base which formed between 4Q 2008 and 2012. A break clear above 15,000 would reaffirm that demand still has the upper hand. Interestingly, Japan's Topix 2nd Section Index (weekly & daily) is steady near the May high. A clear downward dynamic, similar to what we saw back then on three occasions is required to reaffirm more than brief resistance near current levels. Japan's TSE2 usually leads the Nikkei in both directions.