Prime Minister Shinzo Abe has twice avoided raising the consumption tax, quoting domestic and international economic uncertainties. This time however, despite mixed economic signals and the tax’s unpopularity among voters. Abe appears determined to go ahead with raising the tax. His administration last month approved an annual economic plan confirming the hike in order to cover spreading social security costs.
With the Upper House election scheduled for July 21, the ruling Liberal Democratic Party are seeking voter support for the proposed consumption tax increase in October ahead of the House of Councilors election.
In May, Japan’s gross domestic product fell 0.4% for the first time in four months, according to estimates released by the Japan Center for Economic Research. Moreover, Producer Price Index fell by 0.1% in June y-o-y after a 0.6%rise in May. Besides, lending increased by 2.3% in June against 2.6% growth rate in the previous month.
The result of April-June business sentiment known as “tankan index” shows that the confidence level among manufacturers slipped from 12 in January-March to 7, the lowest level in about three years due to the slowdown of the Chinese economy and U.S.-China trade friction. Although sentiment among manufacturers dropped 5 points, sentiment among non-manufacturers went up 2 points to 23, exceeding market expectations.
Despite the weak tankan results and mixed fundamentals; it appears unlikely that Abe will postpone increasing the consumption tax from 8 to 10% on Oct. 1. BoJ Governor Haruhiko Kuroda expects Japan’s economy to continue its moderate expansion and gradual movement towards the central bank’s 2% inflation target.
April 2014 was when Abe carried out the last consumption tax hike and Haruhiko Kuroda took radical quantitative and qualitative monetary easing, which depreciated the Japanese yen. A weak yen means imports become more expensive, deterring consumers from purchasing. Along with high oil prices at that time, inflation was already running at around 1% before the tax hike.
Regarding the impact from a tax hike this October, low inflation, moderate oil prices, lower taxes for food and cashless purchase incentives would promote consumption.
The USD/JPY pair built on its steady from weekly lows and spiked to 108.35 area post-US CPI.
The bearish pressure on US Dollar, triggered by Fed Chair Jerome Powell’s dovish remarks in the second week of July, eased following the positive data of US core CPI figures - rising by 0.3% on a monthly basis (0.2% expected), enough to trigger a spike in the US Treasury bond yields, which extended some support to the pair to recover a major part of its early slide to sub-108.00 level.