Japan: Economy still in great shape but sales tax hike is looming – Danske Bank

Should Abe’s coalition stumble at the finish line in the upcoming elections, Japan is not likely to change political course dramatically, feels the analysis team at Danske Bank.

Key Quotes

“Party of Hope is a conservative party close to the LDP in many areas. One key difference relates to the planned sales tax hike in October 2019, though. Abe needs it to fund social security spending and at some point pay down Japan’s enormous debts. Koike wants to freeze it to ensure economic recovery and impose a tax on companies' internal reserves instead. Also, the CDP does not want to impose the hike all at once.”

“We expect the Japanese economy to stay on track, supported by the global economic recovery. The large Japanese manufacturing sector recently showed the most optimistic business outlook in a decade and the economy in general seems in good shape. That said, it is a risk that Abe will focus too much on revising the constitution and refrain from working hard on the third pillar of Abenomics (structural reform). No matter what, it remains a challenge for Abe to keep the economic upturn going for another two years so Japan does not go into recession when the sales tax hike hits. It might be wiser to make the increase gradually in order to avoid a situation like 2014, where private consumption surged due to exactly a sales tax hike. We saw some improvement in domestic demand earlier this year, but generally the economy is still very dependent on the global economic recovery and an ultra-accommodative economic policy still looks necessary.”

“In our main scenario, we expect the Bank of Japan (BoJ) to keeps its policy unchanged, maintaining the short-term policy interest rate at -0.1% and the 10Y Japanese government bond (JGB) yield at 0% over our 12M forecast horizon, assuming BoJ governor Haruhiko Koruda is reappointed when his term ends in April - this seems likely, as Abe can do this with a simple majority.”