As the weekend approaches, Asian markets are still coming to terms with the U.S. Federal Reserve’s surprise no taper announcement. The Fed’s unexpected decision to maintain its $85-billion-a-month bond-buying stimulus caused the dollar to sink against G10 currencies excluding the yen and sparked a rally in global equities. Emerging market currencies got the biggest boost while the dollar has returned to familiar territory, just shy of the ¥100 psychological barrier.
The Japanese press is reporting that Japan’s Prime Minister Shinzo Abe is said to have decided to proceed with raising the island nation’s consumption tax from 5% to 8% in April as previously scheduled. The government is expected to implement ¥1.4-trillion worth of corporate tax cuts as part of a previously announced stimulus plan to coincide with the consumption tax hike.
A drastic corporate tax cut is deemed necessary. By lowering the country’s high effective corporate tax rate (38.01%) down to a level on par with other nations, Abe hopes to improve the financial strength of Japan-based companies. These companies are then expected to increase wages and salaries to help improve consumption. However, a recent Reuter’s poll suggests Japanese companies are largely ignoring the prime minister’s call to boost wages.
Reluctance Reigns in Abe’s Cabinet
Not everyone in Abe’s cabinet are convinced implementing a corporate tax cut while hiking the sales tax would be wise. Namely, Finance Minister Taro Aso remains reluctant to approve corporate tax cuts as proposed by Abe. He is concerned that ending reconstruction tax on businesses “could rouse discontent in disaster-hit areas and derail any efforts to half the nation’s primary balance deficit in fiscal 2015.”
However, Abe plans to make a final decision on October 1 following a key Bank of Japan survey gauging business sentiment. The government is currently trying to agree on a +¥5-trillion economic package to prevent the tax hike from causing the Japanese economy to falter.
The benefits of Abenomics’ weak currency policy have already been seen. Since 2010, Japan’s trade deficit has eased and exports are growing at a healthy clip. The trade deficit eased to -¥960.3-billion in August while exports grew +14.7%, year-over-year, in the same month.
Much has been made about the damage a planned sales tax spike would do to Japanese confidence and growth. The nation is forecasted to grow +2.8% in the fiscal year to March 2014. While growth is expected to slow to +0.7% in the following fiscal year as the first sales tax reduces consumer spending.
The USD/JPY rally since Wednesday’s Federal Open Market Committee (FOMC) decision is being blamed on the foreign exchange (forex) market’s rush to sell yen to fund ‘carry.’ All it has basically done is increase the already large short-yen spec positions. The pair is currently straddling pre-FOMC levels. Due to the depth of yen shorts across the board, expect further weakness to be a “grind”. On the flipside, the lack of more dollar buyers could weaken support and squeeze some weaker yen shorts out of their current positions.
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- Business Confidence Drops in Asia | OANDA Forex Blog
- India Increases Import Duty on Gold Jewelry | OANDA Forex Blog
- Chinese Government Fails To Cool Housing Market | OANDA Forex Blog
- NZ Deputy PM: Property Prices a ‘Concern’ but OK | OANDA Forex Blog
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- Abenomics Weakness Seen In Vacant Japanese Houses | OANDA Forex Blog
- Chinese Shadow-Banking System Remain Strong With Latest 20% Loan Fiasco | OANDA Forex Blog
- Japanese Congress Still Undecided on Corporate Tax Cut | OANDA Forex Blog
- Japan Expecting Another Trade Deficit on Thursday | OANDA Forex Blog
- RBA Minutes: Keeping an Open Mind on Rates | OANDA Forex Blog
- Malaysia To Reduce Government Spending | OANDA Forex Blog
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