According to the data released this morning, Japan’s consumers stayed home in April and we can thank the new consumption tax for this. However, this was not unexpected. We knew there was going to be some negative impact to the Prime Minister Shinzo Abe’s new consumption tax.
For the month of April, retail sales took a hit. They tumbled 4.4 percent on the year as consumers decided not to spend. This was greater than the expected fall of 3.3 percent and the biggest decline since the disastrous earthquake and tsunami of 2011. In April, Japan’s sales tax was raised from five percent to eight percent in a move to help with the country’s excessive debt level. This could reinforce the chance the Bank of Japan (BOJ) further eases monetary policy.
The BOJ is just now beginning to shift its focus from growth support to finding ways to end its massive monetary stimulus. They are beginning to take tentative steps towards this potentially momentous move that will affect the global economy. They have started internal talks how to end this 13 month old quantitative easing program that was the very core of Abe’s economic plan to end 20 plus years of deflation and pitiful growth. The current BOJ governor, Haruhiko Kuroda has pledged to keep the money injections until inflation hits two percent but with the inflation now past its halfway mark to the target, and some signs that the economy is holding up to the consumption tax increase, the BOJ is starting to ponder the future with no QE.
Kuroda wants to make sure he and his team avoid the same mistakes the United States made and keep market confusion to a minimum if none at all. This is the first hint that they are getting ready to make a change in policy direction.
Getting back to the consumption tax. It is expected this will impact Japan’s economic activity through the second quarter of this year which is reinforcing the above notion the BOJ will ramp of up its stimulus before tapering it. The economy will need some more support. Kuroda is convinced that the impact from the tax increase will be temporary. The BOJ feels the economy will continue to expand but some additional support might be needed. There are signs, positive ones, from last month that suggest Japan’s economy will ride out this tax hike well.
We saw corporate orders for machinery rising at its fast pace ever in March. The expectations is for this momentum to continue into this month and quarter. Meanwhile, the gross domestic product (GDP) grew better than expected at 5.9 percent, annually, in Q1 2014. This was its fastest pace in over three years.
Still Abe and his BOJ team are monitoring the tax increase with great care. Their goal is to end decades of deflation and tepid to no growth. The last time they raised taxes in 1997, the country fell into a recession. Critics of this new tax increase fear history will repeat itself. However, in 1997, Japan had to deal with the Asian financial crisis which hit them as well. In order to ensure history does not repeat itself, the government is spurring public works projects to help support the economy and its labor market. There is also expectations of wage increases which should support consumer spending through the second quarter as second half of the year.
Binary Options Take for the Day
Watch the yen. It should see some volatility, especially with the BOJ hinting that their QE program will end at some point. The Dollar is also weak across the board. Also keep an eye on base metals like aluminum and copper. We are seeing demand out of Japan increase but weakness in China.
Discussion
When do you think the BOJ will end its QE program? I do not think this will happen until sometime in late 2015. Sound off in comments below.