Abe Seen Facing Stock Rout in Case of Japan Tax Rise Delay

Japanese shares could plunge 10 percent or more if Prime Minister Shinzo Abe fails to carry through on a plan to raise a sales tax in April.

Postponing an increase would have a large and negative impact on Japan’s financial markets, said 22 of 32 economists in a Bloomberg News survey. JPMorgan Chase & Co. Senior Economist Masamichi Adachi said a delay could push stocks down 10 percent, wiping out $418 billion in market capitalization, while UBS AG Economist Daiju Aoki predicted a sell-off as steep as 12 percent in the Nikkei 225 Stock Average.

The survey results bolster the case for Abe to boost the tax to shore up the indebted nation’s finances and maintain faith in Japanese bonds, even at the risk of hitting households saddled with stagnant wages and the fastest consumer-price increases since 2008. The consensus contrasts with the view of Standard & Poor’s Chief Global Economist Paul Sheard, who warned in June that Japan could make a policy error through a premature fiscal tightening.

“Abe doesn’t have much choice as delaying the sales-tax plan would be too risky,” said JPMorgan’s Adachi, who is a former Bank of Japan official. “Abe would lose all of the trust that has buoyed Japanese markets so far.”

While economists over recent months have highlighted the likely blow to consumption and the risk of the economy sinking into one quarter of contraction due to a higher sales tax, the government may be able to use stimulus to cushion the impact.

Yield Surge

The Nikkei 225 has rallied 55 percent while the yen has fallen 18 percent against the dollar since mid-November, when investors started to price in an election win in December for then-opposition leader Abe and his calls for policies to stop deflation and revive the world’s third-largest economy.

A law enacted last year gives Abe the power either to let the levy rise to 8 percent in April and 10 percent in 2015 from 5 percent today, or to hold off if he concludes Japan’s economy isn’t strong enough to withstand the increases.

Abe’s decision is seen as a test of his commitment to reining in Japan’s debt, now more than double gross domestic product. If he puts the sales-tax increase on ice, the shock to the markets could cause the 10-year government bond yield to surge and the yen to rise above 95 yen per dollar, said UBS’s Aoki. The yen fell 0.1 percent to 99.63 per dollar at 17:19 p.m.

Big Negative

Aoki was one of 10 analysts in the Bloomberg survey who forecast a “significantly large” negative impact, while 12 others predicted “large” adverse effects on markets. Seven said there wouldn’t be much of an impact from a delay.

“The impact would be bigger if inaction stokes concern Abenomics is losing momentum and Abe and the BOJ are not getting their act together,” said Masaaki Yamaguchi, an equity market strategist at Nomura Holdings Inc., Japan’s biggest brokerage. “That would mean putting off fiscal rehabilitation and yields may rise in a bad way, another big negative for stocks.”

Postponing the sales tax increase would cause “enormous damage” to the Abenomics agenda, said Mitsumaru Kumagai, chief economist at Daiwa Institute of Research in Tokyo.

“It would make it difficult for the BOJ to buy more government bonds amid doubts about fiscal consolidation, which would be negative for the economy and efforts to generate inflation,” said Kumagai.

Absolute Chaos

If Abe decides to put off implementation, a Diet session set for this autumn would focus on the sales tax, disrupting debate on planned growth strategies and inviting “absolute chaos” in the markets that could send the Nikkei 225 tumbling 16 percent, said Kumagai.

Japan should increase the sales tax in line with the Diet’s decision last year, S&P’s Sheard said in June. “The question is the timing. Is one year into the attempt by the Bank of Japan to end deflation the right time to do that?” Sheard said.

In the past 15 years Japan sometimes put its foot on the “monetary accelerator” at the same time as hitting the “fiscal brakes,” said Sheard.

Koichi Hamada and Etsuro Honda, Abe advisers behind his reflationary policies, have said the economy isn’t strong enough yet to weather the burden of a higher tax.

Reflating Economy

Not all economists agree that a delay in a sales-tax increase would hit financial markets.

Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, said postponing the consumption-levy increase would have the opposite effect on stocks than some analysts suggest. He said it could lift the Nikkei 225 by about 1500 points, as it would symbolize Abe’s commitment to reflating the economy. The Nikkei 225 gained 0.5 percent to 14,053.87.

Naoki Murakami, chief economist at Monex Inc. in Tokyo and a former Goldman Sachs Group Inc. economist, said a delay would significantly raise the odds of ending deflation and boosting growth, aiding stocks and weakening the yen.

A decision in 1997 to boost the sales tax to 5 percent from 3 percent, combined with the Asian financial crisis, helped push Japan into recession, costing then-Prime Minister Ryutaro Hashimoto his job. Other Abe predecessors including Naoto Kan and Yoshihiko Noda lost elections after putting a sales-tax increase on the table.

Kuroda’s Take

BOJ Governor Haruhiko Kuroda has said raising the sales tax and ending deflation are achievable at the same time, citing the BOJ’s economic projection for 1.3 percent growth in the fiscal year starting in April. He said last month that monetary policy is closely related to Japan’s fiscal health.

Gross domestic product data for the second quarter, which may help inform Abe’s decision on the sales tax, will be revised upward following higher-than-forecast capital spending figures this week, said JPMorgan and Nomura Securities Co. A stronger growth reading than the preliminary 2.6 percent annualized expansion would support the case for a sales-tax increase, they said.

Abe will make a decision in the first half of October, Amari told reporters yesterday. About 70 percent of 60 economists, business leaders and representatives of households invited to the government panels favored raising the levy, Amari said.

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