The Japanese government and the Bank of Japan (BOJ) are in damage control this week after it was announced Monday the country had slipped back into a recession as economic growth contracted in the third quarter. Officials are blaming the sales tax hike, but is there something more?
Speaking at a news conference Wednesday following a meeting of the BOJ policy board, central bank governor Haruhiko Kuroda told reporters that last month’s decision to increase its easing initiative – it will increase its yearly purchases of government bonds and other assets by as much as 20 trillion yen ($181 billion) for a total of 80 trillion yen ($725 billion) – was not a “mistake.”
Instead, Kuroda placed the blame solely on the April sales tax hike and the possibility that Prime Minister Shinzo Abe would do so again this month. The BOJ head explained that last month’s monetary policy decision was based upon the assumption the government would impose another consumption tax hike.
The prime minister announced Tuesday he would delay any sales tax hike by another 18 months.
“The 18-month delay in the tax hike doesn’t make me feel as though the additional easing was a mistake. Other board members don’t think so either,” said Kuroda. “The government and the Diet are responsible for fiscal discipline, and not the BOJ.”
Kuroda added that it’s imperative for the Japanese government to push ahead with its fiscal reforms to ensure the financial sustainability of the state. Prior to the news conference, Kuroda and his colleagues were amiable in maintaining its enormous easing plan and reaffirmed its positive outlook on the economy moving forward.
Should the BOJ act aggressively?
Soon after the economic data was released Monday, Koichi Hamada, a close economic adviser to Prime Minister Abe, averred that the central bank doesn’t need to enact any further stimulus in response to the weak economy. However, if future economic reports present negative data then the BOJ would have to act accordingly.
“If the next data, or the next-next data again showed that the economy was in terrible conditions, the BOJ would have to act once again, without pulling any punches,” Hamada told the Wall Street Journal.
In regards to the sales tax hike, Hamada noted that he favors the government providing the impoverished with a cash handout if they cannot live day to day with a higher sales tax and a weaker yen.
Japanese shares struggle
At the end of the Wednesday trading session, Japanese shares continued to tumble. The Nikkei dipped 0.3 percent, but the Topix index rose 0.1 percent on news that Abe would delay a tax hike. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.4 percent to a three-week low.
“Postponing the consumption tax would be positive for stocks,” said Ryota Sakagami, chief strategist at SMBC Nikko Securities, in an interview with Reuters. “But the ruling party bloc is likely to reduce their seats. Their victory is unlikely to create hopes for big changes. So we do not anticipate the type of boom in Japanese stocks we saw after elections in 2005 and 2012.”
In the United States, markets are experiencing a slight decline as the Dow Jones, S&P 500 and Nasdaq are all in the red (at the time of this writing). The economic news coming out of Japan and the Federal Reserve releasing its minutes from the latest Federal Open Market Committee (FOMC) meeting are contributing to the declining stocks.