Japan’s coming recession due to trade war – and fiscal stubbornness

TOKYO -- After delaying it in two occasions, Prime Minister Abe finally had the courage to raise the consumption tax to 10% on October 1, sats the global financial group Natixis. But it criticises the Government's timing.

"The planned increase in the consumption tax in Japan, which predated the global financial crisis, was aimed at improving Japan's poor public finances, but the very weak global environment and Japan's own woes kept on delaying its full introduction," Natixis says in a research report.

"The problem is that today's situation is not much better than it was then as the global economy faces much lower growth in the midst of a US-China trade war, which has reverberations more globally.

"Sentiment has really worsened in Japan, partially due to the tax hike."

However, Natixis says, the worst sentiment relates to trade, which is understandable as export growth is already falling.

"Against such background, the Japanese Government has had the courage - or the stubbornness - to hike the consumption tax rate as programmed.

"However, the situation is very different to the previous tax hike in 2014 when global demand was strong.

"In fact, other than the much more negative external environment, nominal wages are very weak, so the tax hike will further erode consumers' purchasing power, reducing private consumption.

"On the back of these developments, Japan is expected to fall into a recession from the next quarter, which will probably trigger a policy reaction.

"In fact, Abe recently mentioned that the Cabinet will announce, by the end of October, whether a fiscal stimulus package is necessary to counteract the increasing economic risks.

"A fiscal package to counteract a fiscal measure seems strange, but less so in Japan where the room for additional monetary stimulus is increasingly limited.

It is kind of ironic that a consumption tax hike may prompt a fiscal response in the opposite direction, but this is what the Japanese economy seems to be heading towards in the light of a very likely recession."

www.natixis.com (ATI).