The Week In Hindsight 28 March 2014

Despite that the Japanese unemployment rate fell to a six and a half year low during February concerns still exist over the effect the planned sales tax increase is likely to have on the economy. This will see the Japanese equivalent of VAT increase from 5% – 8% and is due to take effect from Tuesday 01 April. Some observers have questioned the impact this could potentially have upon the Abe governments efforts to reignite price pressures in Japan and reform the economy.

Should it have a negative knock on effect which leads to lower consumer spending, lower growth and lower inflation or disinflation then there is a possibility that the work and achievements of Shinzo Abe’s government over the past eighteen months will be unwound.

Our view has remained constant throughout the run up to Tuesday’s changes and still remains so today. This is that the tax measures are a necessary part of a grander plan, and without the increase to the sales tax Japan’s government will have little means of use to tackle what is now the world’s largest sovereign debt pile, currently equivalent to 260% of GDP.

In addition to this, any signs of deterioration in the economic outlook are likely to be met by further stimulus which would in turn support inflation. Should inflation remain a constant while JGB yields are kept low from stimulus then even below 2% levels, then Japanese investors could find themselves forced to transfer some of the nation’s $8 trillion in cash savings deposits into the stock market in order to make a return or just preserve the value of their assets. This would be positive for investors in Japanese stocks.

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