Japan – Consumption tax hike delay and early elections……
Intesa Sanpaolo – Research Department – For professional investors and advisers only
FOMC minutes – Confidence in the sustainability of domestic growth, monitoring of inflation expectations and debate over guidance.
Prime Minister Abe has announced the postponement to April 2017 of the consumption tax hike (from 8 to 10%), originally planned for October 2015, and dissolved Parliament’s Lower House, calling early elections for December 14th. The second tranche of the tax hike was conditioned upon an assessment of the economic situation following the first increase (from 5 a 8%) implemented in April. Q3 GDP data, released on 17 November, showed an unexpected -0.4% q/q contraction, from -1.9% q/q in 2Q. The PM has indicated that a stimulus package will be prepared for 2015. Abe stressed that the 2017 hike will not depend on the economic picture, and made it clear that it is imperative to step up the consumption tax to 10% in order to be able to meet social security obligations.
The need to keep pursuing fiscal consolidation justifies the calling of early elections, which to be held on 14 December. The PM said that “there can be no taxation without representation”: the December elections should assign a clear mandate on fiscal policy, that will require further stimulus in the short term, and structural reforms in the medium term, with a consolidation of public accounts. At present, the government coalition can count on a wide majority in Parliament; the LDP has 294 seats, and Komeito 31 seats, for a total of 325 seats out of 480. Even in the event of the LDP losing up to 86 seats, the December vote is likely to confirm a majority for the ruling coalition, together with the mandate to keep pursuing Abenomics. The combination of expansionary fiscal policy and further monetary stimulus in 2015 points to a likely re-acceleration in growth, albeit at a still moderate pace. In light of negative 3Q GDP data, we have revised downwards our growth forecasts to 0.3% in 2014, 0.6% in 2015, and 1.7% in 2016.
The minutes of the FOMC meeting of 28-29 October have not changed the picture for US monetary policy. The Committee discussed the risks deriving from the slowdown in growth in Europe and Asia, and the volatility of the markets recorded in October, but concluded that the effects on the US economy should be “rather limited”. Confidence in the sustainability of domestic demand has justified putting an end to QE3, as planned. The debate during the meeting touched on several issues, including in particular the trend of inflation and the change in guidance.
The FOMC expects inflation to fall further in the short term, and to rise back subsequently towards 2%. However, “many participants” believe it is important to keep closely monitoring evidence of a “possible downward shift in longer-term inflation expectations”, which would be of particular concern if combined with a slowdown in economic activity.
As regards guidance, “some” participants were in favour of eliminating the reference to “considerable time”, which however was ultimately confirmed in order not to risk misinterpretations on the markets with regards to the timing of the initial interest rate hike. The possibility was discussed of providing indications on the path of rate hikes, although it was stressed that, given the uncertainty clouding the economic and financial developments, it will be important to retain a high level of flexibility. The debate on guidance will continue at the December meeting: the FOMC intends to exercise great caution in changing communication.
On the whole, the minutes have not changed the expected monetary policy scenario: the evolution of data should remain favourable in our view, supporting a deepening confidence in the sustainability of the recovery, and the probability of the rates lift-off taking place in mid- 2015.
Quelle: BONDWorld.ch
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