Japanese shares could plunge 10% or more if Prime Minister Shinzo Abe fails to carry through on a plan to raise a sales tax in April.
Postponing an increase would have a large and negative impact on Japan’s financial markets, said 22 of 32 economists in a Bloomberg News survey. JPMorgan Chase & Co. Senior Economist Masamichi Adachi said a delay could push stocks down 10%, wiping out $418 billion in market capitalization, while UBS AG Economist Daiju Aoki predicted a sell-off as steep as 12% in the Nikkei 225 Stock Average.
The survey results bolster the case for Abe to boost the tax to shore up the indebted nation’s finances and maintain faith in Japanese bonds, even at the risk of hitting households saddled with stagnant wages and the fastest consumer-price increases since 2008. The consensus contrasts with the view of Standard & Poor’s Chief Global Economist Paul Sheard, who warned in June that Japan could make a policy error through a premature fiscal tightening.
“Abe doesn’t have much choice as delaying the sales-tax plan would be too risky,” said JPMorgan’s Adachi, who is a former Bank of Japan official. “Abe would lose all of the trust that has buoyed Japanese markets so far.”
While economists over recent months have highlighted the likely blow to consumption and the risk of the economy sinking into one quarter of contraction due to a higher sales tax, the government may be able to use stimulus to cushion the impact.
The Nikkei 225 has rallied 55% while the yen has fallen 18% against the dollar since mid-November, when investors started to price in an election win in December for then-opposition leader Abe and his calls for policies to stop deflation and revive the world’s third-largest economy.
A law enacted last year gives Abe the power either to let the levy rise to 8% in April and 10% in 2015 from 5% today, or to hold off if he concludes Japan’s economy isn’t strong enough to withstand the increases.
Abe’s decision is seen as a test of his commitment to reining in Japan’s debt, now more than double gross domestic product. If he puts the sales-tax increase on ice, the shock to the markets could cause the 10-year government bond yield to surge and the yen to rise above 95 yen per dollar, said UBS’s Aoki. The yen traded last night at weaker than 99 per dollar.