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Japan’s tax hikes backed by expansionary monetary policy if required

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Japan’s tax hikes backed by expansionary monetary policy if required

Japan’s central bank governor Haruhiko Kurod has been discussing a sales tax increase in recent weeks. The first of these bursts, to 8% which is almost double the current rate, is scheduled to be implemented in April 2014 and the next step to 10% will be adjusted in October 2015. The decision of whether or not to implement the policy will be made next week as a panel of 59 economists appointed by the government will meet to decide if the economy is strong enough for a fiscal tightening to this extent.

Recent indicators show confidence in the Japanese economy. Japan witnessed three quarters of growth, following a slight scare last November as GDP dropped to a 60 year low. It also appears that Japan is entering an end to its deflationary period, which the BoJ governor would like to take advantage of and support by focusing on business encouraging policy. There, however, needs to be a feasible strategy to manage the country’s public debt which has now exceeded 10 trillion USD.

The increase of the sales tax was decided as an opportunity cost to a more important maintenance of corporate tax exemptions. Analysis of the recent GDP figures showed that the increase in the last quarter was consumer driven, as personal consumption made up a large portion of GDP. Therefore the tax increase is expected to boost government revenue significantly, but should they really be going along with a bite-the-hand-that-feeds-you policy?

Preempting this, the Japanese prime minister announced today that quantitative easing will be made readily available should the tax policy deter growth. This should put traders at ease, as the risk of the policy causing a consumer strike is offset. It does give the impression, however, that the policy is highly experimental and optimistic from the Japanese government.

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