Is A "Lehman-Style Shock" Coming: Abe Announces Sales Tax Delay

Over the past several months, a recurring topic about Japan's economy has been whether Abe would delay Japan's planned consumption tax due in April 2017.

As a reminder, in late 2014, Abe caught markets and voters off-guard when he postponed an unpopular sales tax hike and called a snap election. And, as Reuters wrote in March, "less than two years later, the only surprise will be if he doesn't repeat the play. With consumption weak, wage growth limp and emerging economy slowdowns clouding Japan's growth, economists bet Abe will again delay raising the tax to 10 percent from 8 percent. Currently due in April 2017, the hike is seen by fiscal conservatives as vital to rein in bulging public debt and social security costs."

Furthermore, breaking an end-2014 promise not to delay the tax hike again would give Abe cause to call an election for parliament's lower house to coincide with a July poll for the upper chamber. His ruling bloc already holds a super majority in the lower house.

What is more surprising, is that also over the past few months Abe has insisted that he would not delay the consumption tax increase for a second time, explaining repeatedly that the increase would go ahead "unless a global economic contraction or a Lehman-style market shock jolted Japan's economy."

Well, inquiring minds want to know if a Lehman-style economic contraction is about to hit Japan because moments ago Nikkei just reported what many had expected for months, to wit: "Japanese Prime Minister Shinzo Abe has decided to postpone a consumption tax increase set for next April, judging it to threaten efforts to pull the world's third-largest economy out of deflation."

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Abe is expected to announce the delay after further consideration, including talks with fellow Group of Seven leaders at a summit in Japan later in the month. The economic impact of April's earthquakes in southern Japan has become clear, adding to uncertainty over domestic and global growth.

 

The prime minister informed senior government and ruling coalition officials Friday of his intention to postpone the tax hike a second time. The 8% rate was originally scheduled to go up to 10% last October, following the 3-percentage-point rise of April 2014.

 

How long Abe wants to delay the increase this time is unclear. Some officials say that if Japan waited until April 2019, it could count on a more buoyant economy thanks to the Summer Olympics in Tokyo the following year.

Curiously, the economic impact of every recent olympic games has been to lead to an economic crisis, either before or after, although somehow Japan will be different. 

Junior coalition member Komeito had wanted to go ahead with the April 2017 hike as scheduled to fulfill a campaign promise of introducing a reduced tax rate on food and other necessities.

 

"If that's the prime minister's decision, there's nothing we can do," a senior Komeito official said.

 

Abe will hold a news conference June 1 following the close of the current legislative session. Government and ruling coalition officials see this as a possible opportunity to announce his decision.

 

Postponing the hike does not require a referendum, but voters would have an indirect opportunity to weigh in on the move in an upper house election already set for July. Abe does not intend to call a snap lower house election for the same day.

 

Legislation needed to delay the tax increase would follow during a special session sometime after the election.

The Yen originally liked the news, but with the USDJPY suddenly sliding it appears that the market is now asking the same question as we posed in the title.