Criticism about Japan’s sales tax hike may be unwarranted

Despite the tax increase being well flagged for over a year, there are fears that its introduction may tip the economy back into recession or certainly slow the economy to a halt. The government is well aware of such a possibility so in advance of the increase in VAT counter measures to offset any drawdown in economic activity will be introduced. These measures include a rise in fiscal spending, tax breaks and efforts to stimulate capital expenditure.

It should also be noted that in relation to the last increase in VAT in 1997, which some believe had a detrimental impact on activity, the economy is much changed. Back then, the ravages of deflation (falling prices) were taking hold ahead of what became a very difficult period for the economy. This resulted in the eventual cleaning up of the banking sector several years later. Today the economic picture is very different. Bank lending is rising, housing is recovering and the outlook for corporate profitability is improving strongly aided by yen weakness. Inflation is beginning to return. Moreover, the political sphere looks more solid than it has for some time and with a clear road unencumbered by elections for the next three years, the highly popular prime minister should be able to implement policies to further stimulate activity. The VAT hike may result in some disruption but we trust that on reflection it will merely be a bump in the road for Japan’s drive towards recovery.

Michael Wood-Martin, manager of the Henderson Japan Capital Growth Fund and the Henderson Horizon Japanese Equity Fund.

These are fund manager views at the time of writing and may differ from those of other Henderson fund managers. The information should not be construed as investment advice. Before entering into an investment agreement please consult a professional investment adviser.