Japan’s sales tax hike postponed to Oct 2019; private consumption likely to grow

Japan Premier Abe today stated that the hike in sales tax to 10% will be postponed to October 2019 from April 2017, in line with market expectations. This is the second time the hike in sales tax has been delayed. Initially the hike was to happen in October 2015. The hike was delayed due to the still weak inflation and growth outlook.

Even if the preliminary Q1 GDP data was better than forecast, a convincing rebound in growth has not taken place in the last three years. Furthermore, inflation decelerated to below zero, further impacting the public's confidence in Abenomics, said Nordea Bank in a research report.

“We continue to expect monetary easing, as early as this month, when the BoJ will cut interest rates by 20bp to -0.3%”, noted Nordea Bank.

The Japanese yen is likely to be depreciated in the near term as the market continues to be historical long in the JPY. Hence certain reversal is likely, added Nordea Bank. Abe promised that the sales tax will be delayed again if the Japanese economy was facing a Lehman-like shock. Private consumption is likely to be positively impacted. The earlier hike in April 2014 to 8% drove the Japanese economy into recession as firms and consumers both did not resume spending until the initial shock was over.

But, still it is uncertain that the absence of a hike in sales tax will set off additional spending in itself, according to Nordea Bank. Unless a labor market reform increases base salaries, consumption is unlikely to witness any sustained rise. The postponement of the tax hike might provide Abe with some additional time to push reforms, but progress is uncertain given the huge lobby group resistance. Questions regarding the nation’s fiscal sustainability have been raised due to the delay in tax hike.

“The delay is likely to translate into JPY 4.6tn lost revenue next year, equivalent to 8% of total government revenue or 1% of GDP”, said Nordea Bank.

The negative interest rate policy of the Bank of Japan has aided in lowering the debt servicing burden of the Japanese government. The central bank is likely to lower rate by 20bp to -0.3% in June, added Nordea Bank.