The Week In Hindsight, 07 February 2014

The NIKKEI continued to fall throughout this week as more investors called time on Asia markets and concerns appeared to increase over the viability of tax rises scheduled for April. The concerns over April’s tax rises came as annual wage negotiations between the Japan’s largest corporations and most powerful labour unions got underway.

The unions are pushing for wage hikes of 1% ahead of the Aprils tax increase which will see the Japanese equivalent of VAT rise from 5% to 8%. The move comes as part of the Japanese government’s attempt to address what is now, at 260% of GDP, the world’s largest sovereign debt pile.

NIKKEI 225

Despite the potential long term benefits of greater fiscal prudence, the tax increases have unnerved investors since their announcement. This is because after decades of deflation and declining wages Japanese consumers have developed a tendency to hoard cash wherever possible and it is believed that any further dent to confidence, or any additional reduction in real incomes, could increase the Japanese people’s reluctance to spend. This would clearly hamper growth prospects and as a result, the government’s efforts to revive the economy.

Despite the validity of market concerns, we continue to remain cautiously optimistic where Japan is concerned. As we have stated before, Abe has the full support of the Japanese government in his efforts to revive the economy and has previously demonstrated a “now or never” view of the country’s ability to return itself to a path of sustainable growth.

For this reason we continue to expect the Prime Minister and Japanese policy makers to do all that is within their power to ensure the success of the Three Arrows program.