Weekly Geopolitical Report – Japan: Will the Tax Hike Bite? Part I (October 28, 2019)

by Patrick Fearon-Hernandez, CFA

Even though Japan has one of the world’s largest economies and accounts for a hefty share of global stock market capitalization, it isn’t getting nearly as much attention from investors as it did during its boom years in the 1970s and 1980s.  In part, that’s because Japan’s economic growth has become slower and more erratic ever since its stock bubble imploded in 1989.  Inflation has become worrisomely low, prompting a range of radical fiscal and monetary policies.

Some of Japan’s biggest slowdowns have started with tax hikes, so investors are now worried what will happen after a boost in the value-added tax (VAT) is implemented on October 1.  Since it looks like Japan will weather the new tax hike well, it may be a good time to review the recent developments in the Japanese economy and explain why this tax hike doesn’t seem to be causing problems.  Part I of this report will provide a primer on the current Japanese economy and financial markets.  Next week, in Part II, we will focus on Japan’s geopolitical and domestic priorities, the reasons for the new VAT hike and ramifications for investors.

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