Macro Report:Japan delays scheduled consumption tax yet again,pushing back fiscal consolidation

Despite promises from Abe that a tax hike delay was impossible barring aneconomic shock on the level of the Lehman Brothers collapse, when facedwith the lose-lose decision between hurting the fragile economy in the shortterm or hurting the long term outlook, the government chose the easier path ofkicking the can down the road.

    Though Abe also reiterated promises to balance the budget by 2020, we thinkthis promise is equally hollow. It was our view that the sovereign debt in Japanhas likely already reached a level where it is beyond feasibly reining in, andrecent developments have done nothing to change our view. Government debtto GDP ratio was at 248% at the end of 2015 by IMF estimates, and the BoJ isincreasingly monetizing debt, currently holding 1/3rd of all outstanding JGBs.

    The outlook for fiscal policy is challenging, and increasingly it looks likepolicymakers will have to give up on one of the goals between stimulus andconsolidation; it seems like with the tax hike delay, they have chosen to pushback consolidation efforts to the future; credit rating agencies such as Fitchhave already expressed some concerns with the delay, and there is risk thatJapanese debt may need reviewing down the line. With debt monetizationongoing, fiscal consolidation delayed, and more stimulus likely on the way, thedebt situation is increasingly vulnerable to downside catalysts. We continue toadvise caution over the long term risks tied to the Japanese government bondmarket, and for investors to be aware of the warning signs already in place.

    In the short term, the delay to the tax hike is supportive to the Japanesegrowth outlook in 2017; the 2014 tax hike wiped out significant economicmomentum. However, in absence of any new major stimulus packages, thegrowth outlook remains weak; with limited ammunition left for policymakers, itremains to be seen if more unorthodox policies can be implemented.