Nikkei reports consumption tax hike to be put off - Nomura

Nomura's Japan Economics Team note that if reports from Nikkei are true on Japan delaying a planned sales tax hike, focus will now be on new date.

Key Quotes

The 14 May edition of the Nikkei reported that Prime Minister Shinzo Abe has decided to postpone the increase in the consumption tax rate to 10% planned for April 2017. The increase had been expected to be postponed as the economy remains in the doldrums. Some had thought that a decision might be made after this summer's Upper House election.

However, if the report is correct, Mr Abe may have considered it more important for the government to show its commitment to growth before the G7 IseShima summit later this month and before the Upper House election, or may have taken into consideration the need to set a fiscal consolidation target in the Outline of Basic Policies for Economic and Fiscal Management and Reform scheduled for release at the end of this month.

If the increase were to take place in April 2017 as scheduled, we think Japan's GDP growth could accelerate from the end of this year, largely as a result of an anticipatory surge in consumer spending, and GDP could shrink in reaction in FY17. If the increase is postponed, we can expect neither an anticipatory surge in demand in FY16 nor a reactionary decline in FY17. We would expect the surge and subsequent decline to occur before and after the new date for the increase.

The problem is how long the increase is likely to be postponed for. According to a report in the 15 May edition of the Nikkei, the government is mainly considering a range of 1–3 years for the postponement. The report says within that range it is likely to favor 2–3 years.

However, we think postponing the increase for two years to April 2019 would affect the Upper House election that summer, while postponing it for three years to April 2020 would put a damper on the Olympics.

Furthermore, postponing it for any longer would put a question market against the government's target of returning the primary fiscal balance to surplus in FY20. That leaves postponing the increase for one year until April 2018 or, if the government decided that one year would not be long enough for the economy to recover, for 18 months until October 2018 and simply adjusting its interim fiscal consolidation target for FY18 as possible options.