Japan Stocks Drop as Abe’s Lack of Stimulus Details Disappoints

Digging Deep Into Japanese Monetary and Fiscal Policy
  • Sales-tax increase delayed to October 2019 from April 2017
  • Retail stocks fell less than broader market on sales tax delay

Japanese stocks posted their biggest two-day drop in a month after Prime Minister Shinzo Abe disappointed investors by failing to provide details of a fiscal stimulus package as he announced a delay to a sales-tax increase.

The Topix index fell 2.2 percent to 1,331.81 at the close in Tokyo, bringing its two-day loss to 3.5 percent. That’s the biggest such decline since May 2, after the Bank of Japan surprised traders at the end of April by foregoing additional monetary easing. The Nikkei 225 Stock Average sank 2.3 percent to 16,562.55. The yen traded at 109.09 a dollar, rising for a third day.

Abe said an increase to the tax on consumption will be postponed until October 2019 from April 2017 and vowed to take bold economic steps in the autumn, without giving further information. Expectations for a new stimulus package had increased after the Nikkei newspaper reported that the government will provide a 10 trillion yen ($91.8 billion) spending package, while the Yomiuri newspaper said that the premier would unveil a “large” extra budget at the briefing on Wednesday.

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

Easing Chances

Delaying an increase to the consumption tax may lower the possibility of more BOJ easing in the near future, according to Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd. If the central bank expands stimulus now, it would show the government prioritizes printing money over collecting taxes, she said.

“The BOJ is buying government bonds like hot cakes while the government is running a huge deficit,” said Sera. “That’s basically helicopter money already. It seems that in such an environment it’s less likely that the central bank would be able to come out and ease again.”

Abe’s sales tax delay also raised the possibility of rating downgrades for the country’s debt, Sera said. Fitch Ratings warned that the country risks undermining faith in its efforts to rein in debt.

Definite Concern

“It’s definitely a concern how much ratings will be downgraded,” said Sera. “Obviously, that would impact how we rate bonds, so we are paying very close attention to this.”

Investors will now shift attention to Japan’s Upper-House election, which Abe announced will take place on July 10, as well as a decision on U.S. interest rates from the Federal Reserve on June 15, the Bank of Japan’s monetary policy meeting on June 16, and a U.K. referendum on June 23 on whether it should stay in the European Union. Also in focus is a meeting of OPEC taking place in Vienna on Thursday, where ministers will discuss production policy.

Retail stocks, which stand to benefit from the delay to the sales tax, were mostly lower. Supermarket operator Aeon Co. lost 1.5 percent, while the nation’s largest retailer Seven & I Holdings Co. dropped 1.6 percent. A gauge tracking 185 retail stocks in the Topix fell 1.3 percent, less than the broader market.

Carmakers slumped after U.S. auto sales fell in May for the first time since January. Honda Motor Co. sank 4.2 percent after its American sales dropped 4.8 percent last month, while Mazda Motor Corp. slid 3.2 percent after revenue from north America declined 4.3 percent in the same period.

Stronger Yen

Daikin Industries Ltd. dropped 3.4 percent after SMBC Nikko Securities Inc. cut its rating on the maker of air conditioners, citing the potential negative impact from a stronger yen. The Japanese currency gained 0.3 percent to trade at 109.17 per dollar on Thursday.

Yahoo Japan Corp. jumped 3 percent after the Nikkei newspaper reported SoftBank Group Corp. may use its asset sales to boost ownership in the search-engine operator. SoftBank, which already owns about 43 percent of Yahoo Japan, slumped 3.4 percent.

Futures on the S&P 500 Index fell 0.2 percent. The underlying gauge climbed 0.1 percent on Wednesday, with equities rebounding from an early selloff after a report showed U.S. manufacturing expanded faster than expected. Gains were capped as investors braced for the possibility of higher interest rates by this summer.

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