Improvement in Japan's fiscal balance expected

A trend reversal appears to be taking place in the Japanese economy: the growth rate of nominal GDP ("expansionary power", or a driver of increasing tax revenue) is stronger than the ten-year JGB interest rate ("contractionary power", or a driver of increasing expenses). This is the first major change since the bubble economy. In addition to reflationary pressure, a significant improvement in the fiscal balance is expected. 

In effect, a correlation between the difference of nominal GDP growth and the long-term interest rate, and the change in the fiscal balance (e.g. if the fiscal balance was 8% of GDP last year and 6% this year) is observed, says Societe Generale. When expansionary power exceeds contractionary power, the fiscal balance will improve.

Prime Minister Abe insists the next consumption tax (CT) hike scheduled for April 2017 will not be postponed for a second time. This indicates he is strongly committed to reflating the economy by April 2017. If the Japanese economy is strongly reflated by then, economic conditions will not be a concern ahead of the implementation of the CT hike, adds SocGen. 

Based on the BoJ's flow of funds data, the government's fiscal deficit has improved from 8.9% of GDP (Q2 2012) to 4.8% of GDP (Q4 2014) over the past two years. With this improvement still in the preliminary stages, Japan's fiscal situation is likely to improve significantly over the next few years, expects SocGen.