JPY: Delaying tax hike, stimulating economy - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 24, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at Nomura, suggests that that in Japan economic stimulus package is likely if economy takes an unexpected downturn.

    Key Quotes

    “Our main scenario is that the economy grows by just under 1% annualized in 2016 H1 and that the consumption tax is increased in April 2017. However, the outlook for the global economy remains very uncertain, and we cannot rule out the possibility that GDP may shrink q-q for the second successive quarter in Jan–Mar. With an Upper House election due to take place this June or July, this would probably increase the chances of a government economic stimulus package.

    While a package would probably be financed by a supplementary budget, less certain is what it would include and what the source of finance would be: We think it would be most natural for the government to respond to a cyclical downturn by devising an economic stimulus package and financing it by means of a supplementary budget. Therefore it would not be until April or later that any new package is devised. However, implementing an economic stimulus package is one thing, but knowing what to include in it is another. The source of finance would also be a problem. The supplementary budgets for FY14 and FY15 were each worth around ¥3trn. However, it would seem reasonable to us to assume that any supplementary budget for FY16 would be smaller.

    Possibility of a postponement and an simultaneous upper and lower house elections: Another option for dealing with an economic downturn would be to postpone the consumption tax increase planned for April 2017 yet again. One option in such a case would be for the government to dissolve the House of Representatives and seek voters' approval. With an Upper House election looming this summer, we think holding elections for both houses at the same time would be an attractive option for the government.

    The biggest risk is that postponing the increase might trigger a sharp rise in interest rates as a result of increased concern about Japan's fiscal position. However, in view of QQE and the lion's share of outstanding JGBs being held by Japanese investors, we think that such a scenario is unlikely.

    Economic outlook in the event of postponement: Our main scenario at the moment is that the consumption tax is increased as expected in April 2017. On this assumption, we expect real GDP to grow by 1.0% in FY16 but to decline by 0.2% in FY17. If the increase is postponed, we estimate that real GDP would grow by 0.7% in FY16 and by 0.6% in FY17 in line with the Japanese economy's potential growth rate of around 0.5%.”
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