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Economic Woes in Japan

James Boston
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Japanese authorities are remaining defiant in the face of a recent slew of poor economic data. There appears to be somewhat of a stand off developing between the Bank of Japan (BoJ) and the Finance Ministry.

At the core of the issue is the planned sales tax increase due to take effect in April, although this is only a 3% rise in absolute terms it will bring the current sales tax of 5% up to the 8% level and as such is being seen as a very aggressive move.

Domestic demand is benefiting at the moment as consumers clamber to purchase large ticket items ahead of the tax hike. The problem however comes after April, the scale of the likely fall off in demand is unknown but clues can be garnered from two recent events. Firstly, Japanese companies publishing results during earnings season earlier this month have en masse scaled back revenue projections for the next 12 months. Secondly, the Japanese manufacturers sentiment survey was seen yesterday to retract for the first time in almost half a year.

The worlds 3rd largest economy had its concerns further compounded yesterday on publication of the January trade figures. Record deficit numbers were recorded despite the pick-up in exports. The Japanese Yen has fallen over 20% during the past 12 months and this has greatly added to the price of essential imports leading to a situation where import costs far outweigh export gains.

The economy of Japan has gone through a lengthy period of stagnation and is in need of something powerful to jolt it back to acceptable growth levels. The recent sales tax announcement is part of a broader strategy by Prime Minister Abe’s government to attempt to reflate the languishing economy. The issue is that this is leading to more pain in the short term and both the Government and the BoJ are under pressure to relieve this burden, the latter has very limited scope for further monetary easing and so it falls to the Government to consider fiscal stimulus options, this is an uncomfortable situation for an administration that has just announced tax hikes.

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