Can Japanese PM’s bold election gamble save Abenomics?

Japanese Prime Minister Shinzo Abe’s double-pronged move to unveil a surprise election and delay a planned hike in the unpopular sales tax could be his last chance to save Abenomics, Kames Capital’s investment team has said.

 

Abe’s latest bold gamble is to halt an increase in the sales tax from 8% to 10% which was scheduled for 2015. Putting his own career on the line, the Prime Minister has also offered to resign if the accompanying election he announced this week goes against him.

 

Sandra Holdsworth, investment manager at Kames, said Abe’s move to delay the sales tax – while unlikely to please the ratings agencies – could finally generate some inflation and get Abenomics back on track, following the latest derailment of the country’s economy.

 

“Delaying the sales tax increase will not go down well with credit rating agencies, the IMF, or many in Japan as it raises the spectre of ever increasing government debt levels”, she said.

 

“But given Japan’s poor economic growth post the initial sales tax rise earlier this year (when it was raised from 5% to 8%), and its effect on sentiment, this is probably the right thing to do, even though it pushes fiscal consolidation further out into the future.

 

“With Japanese government bonds yields so very low, it also seems to make sense for the government to borrow to stimulate activity.”

 

Whether it is enough to save Abenomics is another matter, Holdsworth said. While the policy was greeted with much fanfare at launch, its initial success has waned, with the latest figures on GDP growth – which has contracted 0.4% in the third quarter of this calendar year – leaving many now questioning whether it is the right approach.

 

Holdsworth said the election coinciding with the delay to the sales tax is essentially ‘make or break’ for Abenomics.

 

“The election appears to be the only way Abe feels he can implement the changes he believes are needed in Japan,” she said.

 

“Abe said today that if the current coalition does not keep its majority then he would resign as it would represent a rejection of Abenomics. So far though, the polls suggest that he will get re-elected despite recent falls in popularity.”