The Japanese Yen has surged against other major currencies following the confirmation that an increase in sales tax is to be delayed. The Dollar slipped from 111.33 prior to the announcement to 109.78 Yen whilst the Euro fell from 124.12 to 122.10 Yen. The strengthening of the Yen will make Japanese exports dearer in importing markets and so not be welcomed by businesses.
The sales tax from its initial level of 5% which was increased to 8% in April 2014, with a final target value of 10% which is still low in comparison to similar taxes in other leading economies. The intention of raising the tax was to bolster the exchequer to help offset the social security and health care costs of an ageing Japanese population.
The move by Prime Minister Abe had been foreshadowed at the recent G7 summit, held in Japan, but Japan watchers have long suspected that the increase would be kicked into the long grass since the economic output of the world’s third largest economy has been mediocre, to say the least. The last hike triggered a quarter of contraction since customers rushed to make their purchases in the month leading up to the hike.
Mr Abe had previously claimed that only a major economic shock would delay implementation of the sales tax rise, promising to make the economy strong enough to take the rise in its stride. Speaking to members of his governing party, Abe noted: “Japan will proceed with structural reforms and mobilize fiscal policy to achieve strong growth. I want to fulfill my responsibility by speeding up Abenomics even more. In that context, I decided to postpone the increase in the sales tax to 10 percent by two-and-a-half years.”
The rise should come into effect in October 2019, having originally been slated for April of next year. The decision will not harm his party’s prospects at the upper house elections which take place next month.
The government is expected to announce details of a further stimulus package, worth between $45 to 90 billion, shortly. Japan is struggling to boost consumer spending which accounts for 60% of Japanese consumption but has remained flat. Finance minister, Taro Aso, commented: “For Japan, the biggest problem is that private consumption hasn’t risen. That’s 60 percent of GDP that isn’t increasing, and so to deal with that, now isn’t the time to raise the sales tax again.”
Japan’s government hopes to eliminate its current account deficit by the end of the 2019-20 financial year. However, it still has the largest debt-to-GDP ratio of any modern economy at roughly $9 trillion, about 220% of GDP.