Derek Halpenny, European Head of GMR at MUFG, notes that the FT is today reporting that the Abe administration has decided to abandon its plan to increase the sales tax from 8% to 10%, scheduled to be implemented in April 2017. Key Quotes “The G7 meeting in May could be the time when PM Abe confirms this and it could then be followed by a double election of both the Lower and Upper Houses of the Diet (only an Upper House election is scheduled) in order to secure another four-year mandate. We think it is very likely that the sales tax increase will be abandoned. Household expenditure within Japan’s GDP data shows how poorly consumer spending has performed. Over the three-year period 2013-2015 that includes the first sales tax increase (April 2014), household spending has averaged -0.2% Q/Q. Clearly a further tax increase at this stage would be damaging. There is also a case to be made that abandoning the tax increase may in fact prove more beneficial in curtailing yen strength. Part of the problem in attempts to keep the yen from strengthening is Japan’s surging current account surplus. Rising crude oil prices may now start to help reverse some of that surplus but in addition a pick-up in domestic demand that lifts broader import demand would also help. The annual change in Japan non-energy imports has plunged since the middle of last year and in February stood at -7.1%, the lowest since the financial crisis in 2008-09 (Chart of page 1). With BOJ monetary policy support pretty much exhausted, the government will have to look at alternative means for stimulating the real economy.” For more information, read our latest forex news.