Notes From Underground: The Japanese Look to Taper Taxes?

The Nikkei index rallied strongly overnight as the Abe Administration floated the idea of possibly cutting Japanese corporate taxes if the consumption tax increases is instituted. The ABE Government is fearful of negatively impacting the economy so continue to be alert to any “tapering of taxation” to keep the present economic growth story on its path. Tonight I am posting Tobias Harris’s post on the view of the consumption tax from Japanese sources. It is a rebuttal to my piece of last week.

Will Abe lead on the consumption tax?

On Friday, Prime Minister Abe Shinzō headed off (jp) to the mountains in Yamanashi prefecture for an eleven-day summer holiday. He leaves behind a growing debate in Tokyo about the wisdom of proceeding as planned with the consumption tax hike scheduled to be phased in from 2014-2015 (5% to 8% in April 2014, 8% to 10% in October 2015). Abe has said he will make his decision about the tax sometime over the next two months, leaving proponents and opponents of the hike to make their cases once again.
 
Arguably the supporters of the tax hike won several victories this week.
 
First, at the start of the week the IMF advised the Japanese government to stick to the plan as concluded in 2012, arguing that the tax hike will signal the government’s commitment to fiscal restructuring and will therefore bolster investor confidence. The IMF has been saying that the consumption tax rate should rise to 15% for years now, so its advice for Japan is not new. But the fund’s intervention gives proponents an important international backer as they make their case to the prime minister.
 
The next victory for proponents of the hike came on Thursday. Bank of Japan President Kuroda Haruhiko, speaking to the press after the BOJ policy board’s regular meeting, voiced his support for raising the consumption tax and said (jp) that the BOJ’s radical monetary policies and the planned hike were not incompatible. Like the IMF, Kuroda stressed the importance of reassuring investors that the Japanese government is serious about getting its financial house in order.
 
Finally, on Friday the Nikkei Shimbun ran a major article (jp; registration required) — basically an editorial — addressed to senior government officials who are “nervous” about the consumption tax increase that sought to reassure them that raising the consumption tax next year would not be like raising the consumption tax from 3% to 5% in 1997. The article opens by explaining that the 1997 hike came in the midst of a regional financial crisis and at a time when the balance sheets of Japanese banks and corporations were loaded with bad debts. Having established that 1997 was a particularly bad time to raise the consumption tax, Nikkei pivots to say that since banks and businesses have more “stamina” today, it’s appropriate to take on the challenge of the national debt in order to reassure global financial markets, which, Nikkei reminds us, are roughly three times larger than they were in 1995. With that in mind, the article warns that at the first sign that the government is not serious about raising the tax, investors will short Japan in a heartbeat.
 
As arguments on behalf of austerity go, there is nothing earth shattering in the Nikkei article, in fact it contains pretty much the same arguments that Paul Krugman has critiqued for years, including in this 2010 column: the “confidence fairy” and the “bond vigilantes.” But the arguments are less important than the reality that Japan’s powers that be are lined up behind raising on the consumption tax on schedule in April 2014. The tax hike not only has the support of the BOJ president and Japan’s leading business daily, but also the head of Keidanren (jp) its most powerful business lobby; Amari Akira, Abe’s own minister for economic and fiscal policy; and leading members of the LDP, which has, after all, campaigned on raising the consumption tax for the last several elections. Of course, it almost goes without saying that the ministry of finance wants to see the tax hike proceed as scheduled.
 
The forces arrayed against the tax, at least at the elite level, are thinner. Hamada Kōichi and Honda Etsuro, Abe’s leading economic advisers, have both voiced skepticism about the current tax hike plan, with Professor Honda’sarguing (jp) that the tax should be phased in at 1% a year rather than in two phases. Saitō Tetsuo, the chair of LDP coalition partner Komeitō’s taxation committee, has stressed the need to take economic conditions into consideration when deciding whether to go forward with the hike. Beyond elite circles, perhaps most significant fact is that the public is overwhelmingly opposed to the tax hike: Asahi’s post-election opinion poll found (jp) 58% opposed and only 30% in favor.
 
Given that sustainable, robust growth is still far from assured — and that wages have yet to rise, suggesting that consumers would really feel the sting of the tax hike — the facts are probably on the side of the skeptics. The proponents still have to explain (1) why the confidence of global markets is so important when, as Michael Cucek reminds us, Japan is largely invulnerable to “bond vigilantes” and (2) why confidence would evaporate now as opposed to anytime over the past decade of swollen deficits. If anything, delaying the consumption tax hike should signal to financial markets that the Japanese government is serious about reviving Japan’s economy.
 
But this week shows that the facts have an uphill battle against a good portion of the Japanese establishment (with the support of international actors like the IMF). After finally securing a plan in 2012 to raise the consumption tax, they are not about to let the Abe government back out of its commitment. With the final decision resting on Abe’s shoulders, this issue is as good a chance as any for Abe to show that he can be the strong, decisive leader he claims to be.
***Did the Mexican peso during the last 30 hours gave us an example of correlation preempting causation. Yesterday, Mexican President Nieto put forward a change to the constitution, which would allow the Mexican people to continue to control its energy resources while allowing for foreign investment into the sector for exploration. The PESO tried to rally on the news, and, in fact climbed higher. However, the rise in U.S. yields starting at 11:00 a.m. CST was too much for the correlative power of higher U.S. yields as a drag on the developing world currencies and debt markets. The peso made its highs at 11:00 with Mexican news release and broke with the bond and note futures. From a fundamental view, a positive story about foreign investment into Mexico is a bullish event, but not when correlations to rising interest rates drive short-term flows.
In the fundamental world, short-term interest rates in the U.S. barely moved and are much lower than Mexican overnight rates–0.25% versus 4% in Mexico. The real fundamental is that in monetary rate terms Mexico has a real rate of return as its inflation rate is 3.47%. The U.S. runs a NEGATIVE real rate of return of NEGATIVE 1.25%. But if U.S. long rates are rising it must be negative for the developing world. In real-time we get an illustration of CORRELATION VS CAUSATION. This is why caution is urged and let the correlationists drive markets so we can find Buffett-like valuations.

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2 Responses to “Notes From Underground: The Japanese Look to Taper Taxes?”

  1. Mario Says:

    Morning!!! Lets set the UNDERGROUND above it peers and find our favorite article over the past three years and sen them to me mario@vfund.com. This will set the Underground apart from all other trading blogs by getting some feedback from us. This is a gift that a infamous trader like Yra. Take advantage of it. Give your feedback. Abenomic, reganomics, always something new, but is it really anything different great point and article.

  2. Mario Says:

    All these seem too familiar when Thatcherism came to be with a significant difference on controlling inflation through reducing government debt and the approach she had on tax cuts vs reagan. But Abe and Thatcher have a relative stance just on the other side of it. As he is looking to reduce gvt debt and he seems to be ignoring the supply side effects of his taxes with an attempt to control deflation.
    https://yragharris.com/2012/09/19/sacrifice/ Great read on Japan from way back when.

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