Analysts Differ on Whether Japan Sales Tax Delay Will Boost Stocks

Abe to Revive Japan's Economy With 'Broad, Bold' Measures
  • Shares drop a second day after Abe confirms postponement
  • The delay has already been priced-in, Mizuho’s Kuramochi says

Japan has removed one uncertainty looming over the stock market with the postponement of a sales tax, but analysts diverge on whether the decision signals a turnaround for the nation’s shares.

After Prime Minister Shinzo Abe confirmed the delay, analysts at Mizuho Securities Co. and Okasan Securities Co. were among those saying that more progress is needed from the government’s stimulus efforts to boost equities. Others were more optimistic that the economic benefits from increased spending will boost shares in the longer term.

The initial reaction from the equities market was decidedly negative, with the Topix index dropping 3.5 percent over Wednesday and Thursday. That came after the gauge jumped for three consecutive weeks to the highest level since April 27 as talk swirled that Abe would delay the increase. For Nobuhiko Kuramochi, head of investment information at Mizuho, the negative reaction came because investors have already priced in the impact of the postponement on corporate earnings and the economy.

QuickTake Abenomics

“The fact that the sales tax hike delay has become official is less important compared to what fiscal policies we can expect,” he said.

Nissay Asset Management Corp.’s Isao Kubo and Nikko Asset Management Co.’s Naoki Kamiyama are in the camp betting Abe’s move will benefit the stock market.

“In the mid-to-long term, it’s going to positively impact both consumer and market sentiment,” said Kamiyama, chief strategist at Nikko Asset Management. “The delay will mean that increasing wages will lead to higher consumption, and the economy overall will get a boost. The risk-premium for Japanese stocks will fall.”

Tokyo equities have struggled to recover after sinking into a bear market earlier this year, as investors all but gave up on Abenomics and its ability to lift the economy out of a 20-year malaise. A strengthening yen has spurred fears over exporters’ earnings, and the Bank of Japan’s attempts to boost growth through negative rates have largely failed to spur faith in shares. The rout that began at the start of the year has left the Topix down 14 percent in 2016, while world stocks have erased their annual losses.

The Topix was down 2.2 percent to 1,331.81 at the close in Tokyo, capping its worst two-day decline in a month.

Abe’s Warning

Abe said on Wednesday that the sales-tax increase will be postponed until 2019 from April 2017 and vowed to take “bold” economic steps in the autumn, without giving specifics of any fiscal package. He told leaders of a Group of Seven summit last week that there’s a risk of a global financial crisis if the right policy measures aren’t taken. An increase in the tax to 8 percent from 5 percent in 2014 -- the last time it was raised -- triggered the deepest contraction in economic growth in more than five years.

Strategists including Kenji Abe of Okasan share Kuramochi’s concern over the trajectory of Japanese stocks. They say Abe’s announcement is not enough to boost the market further, as events including the Federal Reserve’s timing on raising interest rates and the BOJ’s monetary policy decisions will have a bigger impact on the market’s direction.

“The delay in the sales-tax increase is neutral, as it’s not going to change how the economy is now,” said Mitsushige Akino, a Tokyo-based executive officer at Ichiyoshi Asset Management Co. “Confidence in Abenomics is slipping.”

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