Japan postpones hike, sign of monetary policies’ limits

Japanese Prime Minister Shinzo Abe has decided to postpone the expected Japanese VAT hike of 8 to 10% to October 2019.

According to Jean Medecin (pictured), member of the investment committee of Carmignac, this decision may be seen as a sign that unconventional monetary policies might have reached their limits as they are ever more facing the law of diminishing returns.

“Despite unprecedented actions from the BOJ, Japanese CPI (consumer price index) is back in negative territory while Japanese CPI ex food and energy is stuck around +0.7% yoy. At the same time, the yen has kept appreciating despite the adoption of a negative interest rate policy in January of this year.

““Abenomics” is the combination of three “arrows” to fight deflation: monetary policy, fiscal policy and structural reforms. It is therefore not a surprise to witness additional fiscal action while the room for further monetary support is constrained,” Medecin said.

Also Medecin highlighted that with Japanese exports contracting, a VAT hike postpone was necessary to avoid a collapse of internal demand.

He assesses it should give breathing space to the Japanese economic momentum but challenges remain.

“With a massive budget deficit (still at 6.7% of GDP in 2015 despite the VAT increase of 2014 and record low financing rates) Japan is suffering from fiscal dominance, which is further constraining the actions of the BOJ.

“Therefore the extra time won by delaying the VAT rate hike will only be positive if well spent on structural reforms before the monetary policy hit a wall,” Medecin warned.

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