Japanese PM Shinzo Abe has made restoring the Japanese economy to significant growth and the ending of a 20 year run of deflation the priorities of his administration. In order to do this, the Bank of Japan (BOJ) has adopted even more accommodative monetary policies including an aggressive asset purchase scheme and there has been a significant rise in sales tax. Japan has an aging population, meaning that social security and healthcare costs will continue to rise and it has the largest public debt mountain to GDP ratio of any developed economy.
The Japanese GDP for the third quarter of 2014 comes in at an annualised contraction of 1.6%. This is in stark contrasts to analysts’ expectation where growth of 2.1% was being confidently predicted. The increase in sales tax (in April which saw a hike from 5 to 8% - still low in comparison with sales taxes in other leading economies) is being blamed for the contraction with consumers reluctant to spend. Domestic consumption accounts for 60% of Japan’s economic activity, so reluctance of consumers to part with their hard-earned cash has a significant effect on the nation’s economic bottom line.
The Nikkei has recovered from losses earlier in the year and has been at levels not seen since late 2007, more than doubling in value since 2009. However, these equity riches don’t feed back to the average Japanese citizen with only one in five having any shareholdings. It seems that the money pumped into the economy by the BOJ has not filtered down to the Japanese salaryman, but rather stayed in the portfolios of the rich and financial institutions. The upshot is that Japanese citizens are still feeling the economic pinch and it is making them reluctant to part with their cash.
A second hike in sales tax is slated for October of next year, but current thinking is that Abe will defer this. With the opposition still in disarray, there is a suggestion that Abe will call a snap election for next month seeking a mandate to delay the rise (a “no brainer”) and carry on with the economic reforms in hand.
The Nikkei shed 3% on the economic news; its biggest single day decline since August. The Yen is also continuing to decline against other major currencies. It has come off a high of 101.4 Yen to the Dollar in June to stand at 116 currently. This weakness makes Japanese exports cheaper in importing markets and will help the trade balance.