Global Sun: Japan’s Prime Minister, Shinzo Abe, has announced that he will defer an increase in the national sales tax until 2019. An increase in the unpopular tax to 10% from the current 8% had been scheduled for this year but Mr. Abe fears that it could further depress an already struggling economy.The deferral represents a major setback for Abe who took office on a promise to improve the economy and end 20 years of deflation. In a surprising reaction, news of the delay in implementing the hike pushed the yen higher against the US dollar while the Nikkei 225 Index sold off sharply.
Japan has the highest debt-to-GDP ratio in the developed world, currently running at over 240% of GDP. A sales tax increase is intended to shrink the government’s budget deficit by the end of the decade but it would likely push the country back into a prolonged recession.
“Much of the progress made in weakening the yen and stimulating inflation was undone when the Bank of Japan took interest rates into negative territory earlier this year,” said Steven Aaron, Vice President at Global Sun. “The yen is still strengthening against the dollar and the central bank seems to be out of ammunition.”
Global Sun says it is taking long positions on the Nikkei 225 in anticipation of radical measures it believes the Japanese central bank is considering in response to the strength of the yen.
“We think they’re considering so-called ‘Helicopter Money,’” said Aaron alluding to direct monetary funding where the central bank prints money to directly fund government stimulus projects like infrastructure improvements.
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