Sluggish Japan data raise questions over possible second sales tax hike in 2015

Officially, it's suggested it will be implemented.

Economic data recently released in Japan remained lackluster, with the 2Q GDP being revised down to -7.1% (QoQ saar) from -6.8% in the preliminary estimate, and tertiary industry output remaining stagnant in July.

According to a research note from DBS, consumer confidence index also dropped in August. Although machine orders registered a positive growth of 3.5% (MoM sa) in July, it remained far from enough to offset the double-digit declines in April to May.

The report also said that the sluggish data have raised questions about whether the government will go ahead with the second sales tax hike in 2015. So far, the official rhetoric still suggests that the next tax hike will be implemented as originally scheduled.

Here’s more from DBS:

The BOJ Governor Kuroda last week called for the government to stick to the fiscal consolidation plan in order to maintain investors’ trust in Japan’s fiscal sustainability. The Economy Minister Amari this week also emphasized the importance of fixing public finances via raising the sales tax during a public speech.

If the next sales tax increase were to be confirmed, counteracting measures would also be prepared in order to reduce its negative impact on economic growth.

A supplementary budget worth JPY 3trn could be expected. Meanwhile, the government will also likely finalize the details of cutting corporate tax by the end of this year.

In addition, the BOJ is expected to keep monetary policy expansionary by extending its QQE program into 2015. As a result of rising expectations about the divergence in the BOJ’s and Fed’s policies, the USD/JPY rate broke the range of 100-105 and rose to 106 this week.

Speculations are high that a weak yen would be officially tolerated, given the recent comments from the economy ministry that a weak yen is positive for the Japanese economy on the whole.