Sales tax hike delay likely to derail Japan’s fiscal ambition

One of the primary goals of Prime Minister Shinzo Abe, has been to fiscally balance Japan but that goal is in tantrum as he, after chairing G-7 meeting last week in Japan, plans to introduce fresh fiscal stimulus and delay a sales tax hike from 8% to 10%, until 2019.

Early this year, Mr. Abe seemed determined over the tax hike, and said unless event like collapse of Lehman Brothers to hit economy or a natural disaster, similar to 2011 tsunami, he will go ahead with the tax hike. That resolve seems to have diluted. He described current state of the economy and conditions at emerging markets, worse than that of great recession, which is taken by many as setting the stage for delayed hike.

Bank of Japan (BOJ) governor Kuroda, seem to be at odds with the government over this, who said, it is important for Japan to maintain fiscal ambition, which is to get the country from deficit to primary surplus by 2020. In an interview with Hokkaido Shimbun, Kuroda said, “The government has said it will turn its budget deficit into a surplus by fiscal 2020 and this point is important….I think the government will work towards the goal firmly”.

Mr. Abe has been concerned that a hike may push the Japanese economy into recession and central bank doesn’t have much of a tool to deal with that. Previous hike from 5% to 8%, led severe contraction in GDP back in 2014.

Today he finally put an end to the speculation by officially delaying the hike until late 2019. Hike was originally planned for April next year.

Yen has strengthened on the news and currently trading at 109.8 per Dollar.