Abe seen facing stock rout in case of suspending Japan tax rise

Big Negative

Aoki was one of 10 analysts in the Bloomberg survey who forecast a “significantly large” negative impact, while 12 others predicted “large” adverse effects on markets. Seven said there wouldn’t be much of an impact from a delay.

“The impact would be bigger if inaction stokes concern Abenomics is losing momentum and Abe and the BOJ are not getting their act together,” said Masaaki Yamaguchi, an equity market strategist at Nomura Holdings Inc., Japan’s biggest brokerage. “That would mean putting off fiscal rehabilitation and yields may rise in a bad way, another big negative for stocks.”

Postponing the sales tax increase would cause “enormous damage” to the Abenomics agenda, said Mitsumaru Kumagai, chief economist at Daiwa Institute of Research in Tokyo.

“It would make it difficult for the BOJ to buy more government bonds amid doubts about fiscal consolidation, which would be negative for the economy and efforts to generate inflation,” said Kumagai.

Absolute Chaos

If Abe decides to put off implementation, a Diet session set for this autumn would focus on the sales tax, disrupting debate on planned growth strategies and inviting “absolute chaos” in the markets that could send the Nikkei 225 tumbling 16%, said Kumagai.

Japan should increase the sales tax in line with the Diet’s decision last year, S&P’s Sheard said in June. “The question is the timing. Is one year into the attempt by the Bank of Japan to end deflation the right time to do that?” Sheard said.

In the past 15 years Japan sometimes put its foot on the “monetary accelerator” at the same time as hitting the “fiscal brakes,” said Sheard.

Koichi Hamada and Etsuro Honda, Abe advisers behind his reflationary policies, have said the economy isn’t strong enough yet to weather the burden of a higher tax.

Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, said delaying the consumption-levy increase would have the opposite effect on stocks than some analysts suggest. He said it could lift the Nikkei 225 by about 1500 points, as it would symbolize Abe’s commitment to reflating the economy.

Kuroda’s Take

A decision in 1997 to boost the sales tax to 5% from 3%, combined with the Asian financial crisis, helped push Japan into recession, costing then-Prime Minister Ryutaro Hashimoto his job. Other Abe predecessors including Naoto Kan and Yoshihiko Noda lost elections after putting a sales-tax increase on the table.

BOJ Governor Haruhiko Kuroda has said raising the sales tax and ending deflation are achievable at the same time, citing the BOJ’s economic projection for 1.3% growth in the fiscal year starting in April. He said last month that monetary policy is closely related to Japan’s fiscal health.

Gross domestic product data for the second quarter, which may help inform Abe’s decision on the sales tax, will be revised upward following higher-than-forecast capital spending figures this week, said JPMorgan and Nomura Securities Co. A stronger growth reading than the preliminary 2.6% annualized expansion would support the case for a sales-tax increase, they said.

Abe will make a decision in the first half of October, Amari told reporters yesterday. About 70% of 60 economists, business leaders and representatives of households invited to the government panels favored raising the levy, Amari said.


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