Following disastrous GDP figures Japan’s prime minister calls snap election and delays sales tax hike

18th November 2014

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Following the news that Japan has slipped back into recession the country’s prime minister, Shinzō Abe has decided to call a snap election and delay the anticipated sales tax hike.

Analysts were taken by surprise this week when initial estimates for the third quarter showed that the Japanese economy shrank at an annualised rate of 1.6% during the June to end of September period – well below market expectations which had predicted growth of 2.2%.

This marked the second quarter of negative growth in a row, leaving the the world’s third largest economy, in recession territory – for the fourth time since the financial crisis.

The slowdown in the previous quarter, between April and end of June was widely attributed to a fall in demand for goods and services following a hike in consumption tax (VAT) from 5% to 8%. Abe has now delayed a further sales tax hike 18 months.

Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment consistently argued this year’s sales tax hike was a mistake.

Commeting on the latest development, he said: “This is positive for growth and supports the overweight position in Japanese equities we added to on weakness yesterday. We see its delay as good news for the economy and good news for the stock market over the medium term.”

“Abe has dissolved parliament and called snap elections he is certain to win (LDP support 39% vs closest rival DPJ at 9.7%).”

Mark Williams, chief Asia economist at Capital Economics believes that, taken in isolation, the decision not to hike means the economy should be stronger over the next couple of years than would otherwise be the case.

He added: “That in turn should help the Bank of Japan by increasing price pressures. But we still expect inflation to fall short of the 2% target, so more monetary easing is still likely to be required. At the same time though, the decision will anger those – including some at the Bank of Japan – who feel that a strong commitment to fiscal consolidation by the government is the quid pro quo for continued bold monetary easing.”

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