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Consumption tax hike postponed to 2017 – Danske

FXStreet (Barcelona) - Flemming J. Nielsen of Danske Bank comments on PM Shinzo Abe’s announcement for a postponement of the planned hike in the consumption tax and the snap elections.

Key Quotes

“Prime Minister Shinzo Abe today announced that the planned hike in the consumption tax to 10% from 8% for October 2015 will be postponed by 18 months to April 2017. In addition, he also dissolved the Lower House and called for an election in December. The date for the election has not yet officially been announced but is expected to be 14 December.”

“With the consumption tax hike postponed there is also an increasing risk that Japan’s sovereign rating could be downgraded (Standard & Poor’s: AA-, Moody’s: Aa3, Fitch: A+). The current government targets a balance on the public primary budget by 2020. The deficit on the cyclical adjusted primary balance is projected to be 6.1% of GDP in 2014.”

“The implication is that without any substantial improvement in 2015 and 2016, fiscal policy will have to be tightened by more than 1% of GDP annually from 2017-20 if the government’s 2020 target for the primary balance is to be achieved. This looks very challenging.”

“As we argued above, the election and postponement of the tax hike are not big game changers for 2015. Hence, we continue to see a weaker JPY in 2015 but uncertainty has increased in 2016."

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