Japan may benefit from consumption tax link to snap elections

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The potential combination of Prime Minister Abe postponing the planned consumption tax hike and dissolving of the Lower House is well timed.

There is an increased possibility of returning to deflation if another tax hike is introduced as planned. Both the government and financial authorities share the view that the Japanese economy is on the brink of returning to deflation, and the Bank of Japan (BOJ) has already announced additional Quantitative and Qualitative Easing (QQE) based on this expectation.

The government is now planning to shelve the tax increase for the next 18 months, until April 2017, and then put it to a public vote. It is unlikely that the majority of voters will vote against PM Abe if he goes ahead with this plan, with the likely outcome of the ruling coalition of the LDP and Komeito swooping to victory.

More recently, volatility has increased in the Japanese bond market, but we believe the market will calm down again after a short period of movement on the back of the BOJ’s QQE related activities. On the equity market front, we cannot ask for better, especially as the Nikkei nears 18,000.

The PM is scheduled to come back to Japan the same day that GDP figures will be released on the 17th of November. He may then decide to implement an economic stimulus package on the 18th, followed by an announcement of dissolution sometime between the 19th and 28th. This could lead to an official announcement of an election on the 2nd of December and voting on the 14th. This schedule should be acceptable for the Komeito, which is firmly against holding a double election of the Lower and Upper House on the same day in July 2016.

 

Genzo Kimura is an economist for SuMi TRUST

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