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Japan can handle levy hike: ‘Mr. Yen’

Bloomberg

The nascent economic recovery is strong enough to weather an increase in the consumption tax to repair the government’s finances, according to former senior Finance Ministry official Eisuke Sakakibara.

Prime Minister Shinzo Abe’s “Abenomics” prescription of fiscal and monetary stimulus has given the government the leeway to tackle the growing debt burden, said Sakakibara, who as recently as a year ago said the tax could snuff out an economic recovery.

“Abenomics will likely help Japan achieve 2 percent or better growth both this year and next,” Sakakibara, known as “Mr. Yen” for his efforts to influence exchange rates in the late 1990s, said in an interview Tuesday in Tokyo. “Japan should raise the consumption tax as prescribed by the law.”

The 5 percent sales tax is due to be raised to 8 percent in April and to 10 percent in October 2015 to curb the world’s heaviest debt load. Debt will grow to 245 percent of economic output this year, the highest ratio globally, according to the International Monetary Fund.

Japan needs to demonstrate to its Group of 20 peers that it is getting its financial house in order, according to the former currency chief.

“It would be bad if Japan gave the impression it was abandoning this effort,” said Sakakibara, who is now a professor at Aoyama Gakuin University in Tokyo.

Markets have been roiled amid speculation the U.S. Federal Reserve will begin to taper its monetary stimulus program known as quantitative easing as soon as this month, reducing the flow of cheap funds that have bolstered asset prices worldwide. India’s rupee slid to record lows last month while the MSCI Emerging Markets Index of shares has plunged about 12 percent since June.

“With expectations of a QE tapering, funds — particularly from developing economies — have flowed to the U.S.,” said Sakakibara. “It’s possible the global economic structure is starting to undergo a change, with growth in developing nations slowing while the U.S. and Japan flourish.”

A reduction in money printing by the Fed will contribute to strength in the dollar, which may strengthen past the ¥100 level, he said. Even so, Japan’s own economic strength means “there’s no chance of the yen weakening suddenly to the 105 to 110 range.”

The yen has slumped about 13 percent this year as the Bank of Japan pumped more than ¥7 trillion into the economy every month since April through its bond purchases. The currency slide has boosted the earnings prospects of Japan’s exporters.

  • Digger

    Glad to hear the economy is picking up. Wouldn’t have known it if I hadn’t read it here.