Weekly Geopolitical Report – Japan: Will the Tax Hike Bite? Part II (November 4, 2019)

by Patrick Fearon-Hernandez, CFA

Some of Japan’s biggest economic hiccups have started with a major tax hike, so investors are wondering what will happen following a boost in the country’s value-added tax (a type of sales tax) that went into effect early last month.  To lay the groundwork for understanding the VAT hike and its implications, Part I of this report last week provided an overview of the Japanese economy and financial markets, including a discussion of how they’ve performed over the past several decades.  The analysis showed just how sharply Japan’s economic growth has slowed since the boom years of the 1970s and 1980s and the implosion of its asset bubble in 1989.  Part of the long slowdown simply reflects Japan’s decision to gradually eliminate its post-bubble excess capacity and bad debts.  However, we also examined how Japan’s extended revaluation process has been exacerbated by a unique set of headwinds: an aging population, high debt levels and disinflation.

This week, in Part II, we’ll home in on the Japanese government’s geopolitical and domestic priorities and the reasons for its new VAT hike.  We’ll also examine why the tax hike doesn’t seem to be hurting the economy as much as past hikes have.  As always, we’ll conclude with ramifications for investors as they face Japan’s current economic and financial trends.

View the full report