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Japan Prime Minister Abe Calls Election, Delays Sales Tax

Posted by Joseph Trevisani on Nov 18, 2014 2:30:00 PM

Japanese Prime Minister Shinzo Abe has called an election less than two years into his four year term in an effort to secure public backing for his economic program after the nation fell into recession in the third quarter. 

Abe also delayed for 18 months the second increase in the sales tax after the first step in April from 5 percent to 8 percent cut deeply into consumer spending and sent the economy into a tailspin. Japanese GDP contracted at a 7.3 percent annual rate in the second quarter of this year and 1.6 percent in the third following a 6.7 percent pace in the first three months of the year. 

The Diet will be dissolved on November 21st, said Mr. Abe at a press conference yesterday in Tokyo. He did not give a date for the election, but many observers consider December 14th as likely.  

“I thought we should test the will of the people,” Abe noted. “If the LDP-Komeito coalition doesn’t keep its majority, we cannot push forward the three arrows and Abenomics. If we don’t get a majority, it would be a rejection of Abenomics, and I would resign.”

Victory in the election would allow him to stay in office until 2018 and provide the opportunity to accelerate and intensify his mission to end twenty years of deflation and economic stagnation. 

A recent poll by TV network NTV found 39 percent support for Mr. Abe's Liberal Democratic Party with just 9.7 percent for the Democratic Party of Japan, the next in popularity. 

Mr. Abe's economic policy dubbed 'Abenomics' by the press has three planks, monetary easing to devalue the Japanese Yen, stimulus spending to boost the economy and structural reform to make Japan more competitive internationally.

One only of these policies, devaluation has hand any notable success. Since the beginning of December 2012, the month of Abe's election the yen has lost 42 percent of its value versus the U.S. Dollar, falling from 82.29 to 116.86 as of this writing.

Japan's economic growth rose to 5.6 percent annualized in the first quarter of 2012 as the yen collapse began, fueled by exports and corporate profits. It declined to 3.2 percent in the second quarter, 2.4 percent in the third and contracted 1.6 percent in the last three months of the year.

Japan had suffered five recessions of two successive negative GDP quarters or more since the financial crisis in late 2008, including the current one.

Mr. Abe also said he would submit a stimulus package in a supplemental budget to parliament next year. Japan has a long history of ineffective stimulus spending that provides a brief spurt of growth but fail to alter the underlying trajectory of the economy.

The final plank of Abenomics, structural reform, involves difficult changes to the traditional relationships in many parts of the Japanese economy and even reaches into Japanese culture. This is probably one of the reasons that Mr. Abe has avoided these reforms, hoping to have economic success, which has eluded him thus far, before tackling these more difficult problems.  

This election may provide Mr. Abe with enough time to begin the reformation of the Japanese economy, without which Japan is unlikely to escape stagnation, even if he cannot revive the economy through monetary and fiscal stimulus. 

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

 

yen daily nov 18

japan gdp nov 18

 

 

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