Business / Economy

Posen warns Nikkei could crash if Abe blinks on second stage of tax hike

by Simon Kennedy

Bloomberg

On the wall of economist Adam Posen’s Washington office hangs a framed poster of Akira Kurosawa’s 1954 film classic, “Seven Samurai.”

The memento speaks to Posen’s love of Japan, born in his days as a student and since manifested in his career, through books on the nation’s economic woes and trips to Tokyo to advise its policy makers.

In a study published in June 2010, he even blended cultural and economic analysis to show what lessons “Seven Samurai” carries for central bankers.

Such ties to Japan and his role as the president of the Peterson Institute for International Economics lend weight to Posen’s views when he warns that the foreign love affair with Prime Minister Shinzo Abe’s economic program may be in jeopardy.

Posen’s fear, outlined in an interview in his office last week, is that Abe reneges on his plan to raise the consumption tax to 10 percent, from the 8 percent level it was boosted to in April. If that happens, prepare for international investors to dump Japanese stocks and the yen, the former U.K. central banker said.

“If Prime Minister Abe decides to postpone, let alone cancel, he runs a real risk of crashing the stock market,” Posen said.

As disappointment mounts over Abe’s structural deregulation vows, he also is weighing whether to raise the sales levy, which was enacted by the previous government with support from his own party. With a decision set by year-end, what’s giving the prime minister pause is the damage inflicted by the initial bump in April — the sharpest economic contraction in more than five years.

To Posen, delaying the tax measure would test the patience of international investors who have backed Abe’s efforts to both propel his economy out of 15 years of deflation and restore fiscal order to a nation where government debt now tops 240 percent of gross domestic product.

Bank of Japan Gov. Haruhiko Kuroda says that budget consolidation is vital for Japan’s finances and the future of the economy.

Posen agrees, and says the Nikkei 225 stock average’s surge in excess of 50 percent since the start of 2013 is “largely due to foreign investors banking on Abenomics.”

Net purchases of Japanese stocks by overseas investors amounted to ¥14.3 trillion ($132 billion) through August since Abe took office in December 2012, according to Japan Exchange Group Inc.

“Failure to face up to the fiscal situation is not going to be taken well by those investors,” Posen said, noting that the subsequent decline in the yen could force up inflation enough to hurt the real incomes Abe wants to spur.