By Reem Aboul Hosn Research and Market Analyst Officer, CFI Ltd
By Reem Aboul Hosn Research and Market Analyst Officer, CFI Ltd

Tax hike and global slowdown threaten Japan’s economy in 2019

Next October, Prime Minister Shinzo Abe confirmed a raise in consumption tax from 8 to 10 %.  The last consumption tax increase, in 2014, sparked a recession, is there a chance that Abe might postpone the hike once again if economic indicators show a similar scenario? To offset any negative impact to the economy, the government is set to implement fiscal measures and policies, includes free pre-school education, tax breaks for car and home owners, and tax reduction on certain foods and beverages, to alleviate the burden on households.

Next October, Prime Minister Shinzo Abe confirmed a raise in consumption tax from 8 to 10 %.  The last consumption tax increase, in 2014, sparked a recession, is there a chance that Abe might postpone the hike once again if economic indicators show a similar scenario? To offset any negative impact to the economy, the government is set to implement fiscal measures and policies, includes free pre-school education, tax breaks for car and home owners, and tax reduction on certain foods and beverages, to alleviate the burden on households. The 2019 fiscal measures are promising to the economy though it is still unclear how much with the tax burden affect consumer spending and corporate earnings. However the primary aim is to help fund the growing cost of providing social security to a fast-growing population, and bring the country out of slump. 

Business spending remains strong thanks to a construction boom ahead of the 2020 Tokyo Olympics
Business spending remains strong thanks to a construction boom ahead of the 2020 Tokyo Olympics

In parallel, the job market is the tightest in decades, with the unemployment rate near the lowest level since the early 1990s at 2.5%. Meanwhile, Japan’s exports have dipped amid slowing demand for components used in smartphones and could fall further given the recent strengthening of the yen, which makes Japanese products less price-competitive overseas.

Also, business spending remains strong thanks to record-high corporate profits and a construction boom ahead of the 2020 Tokyo Olympics. But business confidence has weakened over uncertainty regarding the trade tensions between the United States and China, which led the International Monetary Fund to downgrade its global growth forecasts in October. Such risks means that Bank of Japan is unlikely to reel in its monetary easing measures until at least the tax hike, even as United States and Europe are on their way to normalizing policy. Given that inflation remains far below BOJ 2% target, companies remain reluctant to raise prices for fear of chasing away frugal consumers. 

The Dollar/Yen continues to trade below 109 levels. The break of this support level paves the way for a drop towards the next key level at 107. For a while now, Dollar/ Yen pair has been trending in parallel with US equities meaning that US equities is a strong driver to the pair’s performance. 

If bulls want to reclaim the market they would need to overcome the 108.50 resistance which would open the doors to 109.70 resistances. On the flip side, a bearish break of 107.70 can lead to a drop to 107.00 support.