No one got more Halloween candy this year than Japanese equities investors. On Oct. 31, the Bank of Japan announced it would increase the size of its annual government bond purchase program from between ¥60 trillion and ¥70 trillion ($519 billion and $605 billion) to ¥80 trillion ($692 billion) and triple its purchases of exchange-traded funds and real estate investment trusts. That same day, the country’s $1.2 trillion Government Pension Investment Fund (GPIF) made a long-anticipated announcement that it would reconfigure asset allocations away from government bonds (down from 60 percent to 35 percent) and into domestic equities (up from 12 percent to 25 percent). Credit Suisse analysts think that single decision could have the effect of sending $185 billion into Japanese stocks over the next five months.
In the two weeks following the announcement, the yen fell 7 percent to ¥116.8 against the dollar, while the TOPIX index climbed 9.5 percent. But as many an American trick-or-treater knows, a sugar rush is often followed by a stomachache. In this case, the pain came in the form of Japan’s unexpected slide into recession in the third quarter, an announcement that sent the TOPIX tumbling 2.4 percent in a single day. In October 2015, Japan is due to enact its second sales tax hike in two years. Though consumer demand and inflation spiked in the first quarter of this year as Japanese consumers rushed to make purchases before the sales tax rose from 5 percent to 8 percent, both fell off just as sharply once the hike took effect. GDP shrank 0.4 percent in the third quarter, marking the second quarter of negative growth. Factoring out the effect of the tax hike, September’s 1 percent core inflation reading is well short of the Bank of Japan’s 2 percent target – thus, the surprise Halloween stimulus.
This leaves Prime Minister Shinzo Abe with a dilemma. Though the economy suffered tremendously from the first tax hike, his coalition partners still want the second increase. Japan’s budget deficit is 6.6 percent of GDP, and the country’s debt is more than twice the size of the economy, the highest in the world. (Some would say the size of the debt doesn’t matter, since the Japanese themselves own most of it, but that’s another debate.) Another tax increase stands to add more than ¥5 trillion ($43 billion) – 1.1 percent of GDP – to the government coffers. But the economy remains fragile, leaving many wondering whether another tax hike in 2015 would be too much, too soon.
Recent reports say Abe is leaning toward postponing the tax hike until 2017, which Credit Suisse’s Chief Japan Economist Hiromichi Shirakawa says would lift Japan’s real GDP by 0.5 percent in the second half of 2015 through 2016. (Abe is also reportedly mulling calling early elections in December to consolidate his support in the Diet before making such a move.) Shirakawa cautions, however, that the benefits of delaying the tax could be rendered moot if the Japanese government decides to tighten its belt elsewhere. Already, public investment is set to begin declining this year after growing substantially following the 2011 earthquake, and Shirakawa does not believe the government will authorize additional spending to make up for it.
And so we return to a familiar state of affairs. Abe has received much praise for keeping the first two pillars of his eponymous Abenomics – fiscal and monetary stimulus – on track. But when it comes to the third pillar, implementing structural reforms to help Japan’s long-term growth prospects, Credit Suisse Head of Japan Equity Research Tim Shanagher recently gave the administration a rather tepid progress report.