The news wires are abuzz with the Yomiuri Shimbun reports that Abe Shinzo is expected to delay the second stage of the consumption tax hikes forced upon him by Noda Yoshihiko by 18 months, meaning that they’re pushed from Q4 2015 to Q2 2017. People are expecting a policy announcement this afternoon, so I decided to get my view out there before that.
Bloomberg is out in force against any increase, added consumption or front-running be damned. Sure, I don’t think the addition of the tax receipts is the big thing, but freeing up space to actually power other reforms is, and anything even holding reform back at this stage is a negative – be that an election or a delayed tax hike. One of my investment axioms that I learned from an early age was that wins or losses doesn’t really matter, what matters is if your money is where they can likely provide the most value for you in the future. After all, we can’t change the past. Increase the consumption tax if it allows you to decrease corporate taxation or social welfare contributions, or decrease it if you find that it is a better use of people’s money than social security or corporate profits. I don’t really care.
All I ask is that the trade-off is realized, and that an informed decision is taken on those grounds. U.S. financial media knee-jerk “We hate taxes, screw idiots trying to implement a VAT tax increase!” is as far away from reasoned analysis as I think we can get.
I will be watching for signs of reform this afternoon, for any signs that Abe will try to support that reform with fiscal measures, and for greater signs of any vision. Japan came out of the Beijing-hosted APEC summit with one of its greatest trading partners (representing the greatest growth prospects) with wins. Build on this too, please?
How is the market reacting to all of this then, in light of yesterday’s horrible data?
It seems to be taking things in stride if you ask Bloomberg, with money managers remaining sanguine and the Nikkei 225 trying to get into 17 300, going strong after the bounce indicated yesterday off 17 070 on the 4-hour candle charts.
Both finance minister Amari Akira and financial adviser Honda Etsuro discussed fiscal measures, with Honda mentioning fiscal support at the 3 trillion yen level as “appropriate” with the hope of this going directly to households to boost consumption. As you can probably guess, I think consumption has run its leg, and with inflation this subdued getting investments flowing is probably a better call, but it shows good promise at least.
Some market participants in the Bloomberg article discussed the buying opportunity that the poor GDP data provides, and I simply have to agree. Abe’s policies are ineffective at reform, but the direction is unquestionable, and with hope the bad data speeds things up and removes political hindrances. It seems the market thus simply returned to its (lack of) senses this morning.
In further commentary on the market commentary, I think that the Wells Fargo representative is as far off as you can be: for investors with long term goals, you accept the risk because you can ride it without getting hamstrung on day-to-day fluctuations. It’s basic CAPM: your returns over the long term are related to the square root of risk assumed and the risk-free return. If you can absorb more risk, and hold for a few years, yield-on-yield really starts working in your favour and provides “free” returns without a corresponding increase in risk.
I do however agree that weakening the yen doesn’t really solve any structural issues (which is why I keep yapping about reform). The rope Abe has available increasingly becomes corporate cash coffers and the hope of CapEx-, payroll- or dividend spending. This is a lot tougher to implement, which means it should have been done all the earlier and means increased focus here on corporate tax- and labour market reforms.