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News Analysis: As Japan Recovers, Fears That Tax Increase Could Halt Progress

September 15, 2013 by

TOKYO — Japan is on a roll. Its economy is growing at a robust rate of 3.8 percent, thanks to the bold monetary and economic policies of Prime Minister Shinzo Abe. Japanese stocks are up 40 percent this year, and the country is on the cusp of overcoming 15 years of deflation. To boot, Tokyo has just won in its bid to hold the 2020 Summer Olympics, raising hopes of an investment and construction boom.

But some economists worry that a plan to raise taxes is coming at the worst possible moment — and could demolish the foundations of a recovery.

“It’s nonsense. Japan is only midway to recovery and hasn’t fully escaped deflation,” said Goushi Kataoka, chief economist at Mitsubishi UFJ Research Consulting, which is affiliated with Japan’s largest bank, Mitsubishi UFJ Financial Group.

“Just as we are beginning to see the light, we’re threatening to snuff it out,” Mr. Kataoka added. “We’re trying to roast the pig before it’s fat enough to eat.”

After weeks of debate, Mr. Abe appears set to go ahead with a plan to raise the sales tax rate in April to 8 percent from 5 percent — part of his bid to rein in the country’s public debt, which has surged to more than twice the size of the economy.

Opponents say raising taxes on spending is premature, especially because it could dampen consumer spending, considered the weakest link in Japan’s nascent recovery. If spending slumps, Japan could slide back into the deflationary morass that has dogged it during the past 15 years, putting the brakes on some of the most promising growth this year among the world’s developed economies.

Still, proponents of raising the tax are pushing for action now because they fear a return to the dysfunction that has marred Japanese politics over the last several years, with a revolving door of prime ministers, said Noah Smith, an assistant professor of finance at Stony Brook University in New York.

Mr. Abe, with solid support, could be the last prime minister in a while to be able to push through unpopular overhauls, he said.

“The optimal policy is to wait to raise the consumption tax, maybe a year. But given Japan’s political dysfunction, many people are afraid that if you wait too long, that will never get done,” Mr. Smith said. “The idea is that if we see a chance to make unpopular structural reforms, we need to take it now, even though it’s not the optimal time.”

To soften the blow, the Japanese government is considering putting together a stimulus package of as much as ¥5 trillion, or about $50 billion, a sum that would return the equivalent of two percentage points of the tax rate increase to consumers and companies, local news reports have said — though Mr. Abe has said he will not a make an official decision on the matter until early October. Japan’s business lobby has also called on the government to cut the country’s relatively high corporate tax rates to make up for a decline in consumption.

Speaking at a government panel on economic and fiscal policy on Friday, Mr. Abe suggested that Japan’s recovery was robust and that its economy was already escaping deflation. He also said that both government and private sector spending before the 2020 Tokyo Games would further bolster economic recovery.

The Games “will be a catalyst that will clear away 15 years of deflation and shrinking,” he told the panel. He stressed that he had made no decision on a tax increase yet.

Backers of a higher sales tax, including Japan’s powerful Finance Ministry, say the move is necessary to rein in the country’s public debt, which by all measures is gargantuan, thanks in large part to the costs of caring for Japan’s swelling ranks of the elderly. This year, national debt topped ¥1 quadrillion for the first time — more than twice the size of Japan’s economy and larger than the economies of Britain, France and Germany combined.

Article source: http://www.nytimes.com/2013/09/16/business/global/as-japan-recovers-fears-that-tax-increase-could-halt-progress.html?partner=rss&emc=rss

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Tax Increase Proposal Raises Fear of a Slowdown in Japan

September 15, 2013 by

TOKYO — Japan is on a roll. Its economy is growing at a robust 3.8 percent, the stock market is up by 40 percent this year, and the country is on the cusp of overcoming 15 years of deflation. Adding to the positive trend, Tokyo just won its bid to host the 2020 Summer Olympics, raising hopes of an investment and construction boom.

What could possibly go wrong?

A plan to raise taxes at the worst conceivable moment, economists warned.

“It’s nonsense. Japan is only midway to recovery, and hasn’t fully escaped deflation,” said Goushi Kataoka, chief economist at Mitsubishi UFJ Research and Consulting, which is affiliated with Japan’s largest bank, the Mitsubishi UFJ Financial Group.

“Just as we are beginning to see the light, we’re threatening to snuff it out,” Mr. Kataoka said. “We’re trying to roast the pig before it’s fat enough to eat.”

After weeks of debate, Prime Minister Shinzo Abe appears ready to go ahead with a plan to raise Japan’s national sales tax rate in April, to 8 percent from 5 percent — part of his bid to rein in the country’s public debt, which has surged to more than twice the size of its economy.

But opponents say that raising taxes on spending is premature, especially because it could damp consumer spending, considered the weakest link in Japan’s nascent recovery. If spending slumps, Japan could slide back into the deflationary morass that has dogged it for 15 years.

Such a misstep threatens to bring down the curtain prematurely on Japan’s economic revival this year, led by Mr. Abe’s bold set of monetary and economic policies, called “Abenomics,” which has brought about one of the most unexpected turnarounds in recent years. Japan is now one of the most promising engines of growth this year among the world’s developed economies

Still, proponents of raising the tax are pushing for action now because they fear a return to the dysfunction that has marred Japanese politics for several years through a succession of prime ministers, said Noah Smith, an assistant professor of finance at Stony Brook University.

Mr. Abe, with solid support, could be the last prime minister in a while to be able to push through unpopular changes, he said. “The optimal policy is to wait to raise the consumption tax, maybe a year. But given Japan’s political dysfunction, many people are afraid that if you wait too long, that will never get done,” Mr. Smith said. “The idea is that if we see a chance to make unpopular structural reforms, we need to take it now, even though it’s not the optimal time.”

To soften the blow, the Japanese government is considering putting together a stimulus package of as much as 5 trillion yen, a sum that would return the equivalent of 2 percentage points of the tax rate increase to consumers and companies, local news reports have said. Mr. Abe has said he will not a make an official decision until early October. Japan’s business lobby has also called on the government to slash the country’s relatively high corporate tax rates to make up for an anticipated drop in consumption.

Speaking at a government panel on economic and fiscal policy on Friday, Mr. Abe suggested that Japan’s recovery was robust and its economy was already escaping deflation. He also said that both government and private sector spending before the 2020 Tokyo Games would further bolster economic recovery.

The Games “will be a catalyst that will clear away 15 years of deflation and shrinking,” he told the panel.

Supporters of a higher sales tax, including Japan’s powerful Finance Ministry, say the move is necessary to rein in the country’s public debt. By all measures it is gargantuan, in large part because of the costs of caring for Japan’s increasing elderly population. Earlier this year, national debt topped 1 quadrillion yen, or $10 trillion, for the first time — more than twice the size of Japan’s economy, and larger than the economies of Germany, France and Britain combined.

Article source: http://www.nytimes.com/2013/09/16/business/global/as-japan-recovers-fears-that-tax-increase-could-halt-progress.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Strategies: Investors’ Quandary: Get In Now?

March 6, 2013 by Leave a Comment

The stock market has already more than doubled since the dark days of 2009. Records are being set, and most indexes have risen nearly every week this year.

Nearly all strategists point out that it is much better to buy at a market bottom than to invest after a record has been set. Nonetheless, for those willing to accept the risk, there are strong arguments, based on history and on market fundamentals, for believing that the bull market may still have room to run.

Chief among them is the expansive monetary policy of the Federal Reserve. “The old song on Wall Street is ‘Don’t fight the Fed,’ and that certainly has been the case in this market,” said Byron Wien of the Blackstone Group, who is a veteran of many market rallies and slumps. “The Fed and other central banks have been driving the market, and there’s no sign that’s going to stop.”

Another critical factor is the flow of funds into the stock market, said Laszlo Birinyi, who runs a stock research firm in Westport, Conn. “There is still a lot of money sitting on the sidelines — and there are a lot of people who are still jumping in, and that, in itself, is a good thing for the market,” he said.

According to his calculations, the net inflow into stocks over the last 12 months has totaled $76.7 billion, which helps to explain why the Standard Poor’s 500-stock index has risen more than 13 percent in that period. Net inflows to stocks amount to $27.75 billion this calendar year, he said, and barring a big shock, they are likely to continue. “We’re in the fourth and last stage of a long-running bull market,” he said. “We think there’s a lot more to come.”

No one really knows whether history is a reliable guide, but the pattern of past bull markets also suggests that this one could continue to flourish. At the moment, according to the Bespoke Investment Group, the nearly four-year run of the United States stock market is the eighth-longest in the last 100 years, and it is the sixth-strongest in terms of the return of the S. P.’s 500 index. And since 1900, when the Dow Jones industrial average reached a nominal high, as it did on Tuesday, the Dow has averaged a 7.1 percent rise over the next 12 months.

“We believe stock valuations are still reasonable, and that the momentum of the market will keep moving it upward,” said Paul Hickey, co-founder of Bespoke.

Because of the intervention of the Fed, even some longtime market bears are reluctant to bet against the current rally. “This is impressive, no doubt about it,” said David A. Rosenberg, the former chief North American economist at Merrill Lynch and now chief strategist of Gluskin Sheff in Toronto. “There are many major risks out there, but at the moment the central banks are doing a spectacular job of buffering them.”

Mr. Rosenberg has a reputation for being a “permabear,” and he has recently emphasized investing in high-yield bonds and corporate credit instruments over stocks. As far as the immediate future of the stock market goes, he said, “I think we’re overdue for a correction.”

Major problems on the horizon, he said, include a weak economy that is being hobbled further by the recent payroll tax increase and the indiscriminate federal budget cuts that have just been put in place. And the troubles in the euro zone, which flared last month in Italy, are far from over, he said, “There are problems everywhere you look.”

Yet he is reluctant to predict a sustained stock market decline. Precisely because the economy is weak, he said, the central banks will be forced to keep short-term interest rates low. “People seeking income have been fleeing other asset classes,” he said, “and they have been moving their money into the stock market.”

For the short term, problems in Europe may actually be helping the United States, said Michael G. Thompson, managing director of SP Capital IQ’s Global Markets Intelligence. “The gridlock produced by the Italian election has been a catalyst for the United States market,” he said in a telephone interview from London. “It seems to have reminded people that Europe is unstable — and so it has given them another reason to move money into the United States.”

Mr. Thompson said that while earnings growth for the S. P. 500 had slowed, a combination of low rates and “canny management by C.E.O.’s of big companies” made it likely that corporate profits would hit a record this year. “As long as the Fed keeps its foot on the gas and as long as we stay out of a recession, I think there’s a good chance this market will continue.”

Not everyone is sanguine, however. “It’s getting downright embarrassing to be bearish with all this exuberance around,” said Rob Arnott, the chairman of Research Affiliates, an asset management firm in Newport Beach, Calif. “With so many people eager to buy stocks, it’s a wonderful time for us to take some risk off the table.”

Mr. Arnott, who manages the Pimco All Asset Fund, said the economy was weak enough that there was a reasonable chance the United States was already back in an undeclared recession. An economic or financial shock could induce a sharp market decline, he said.

“My view is simple,” he said. “Could this rally continue? Absolutely. But do I want to take a risk on a rally that will at some point certainly reverse and leave a lot of people helplessly trying to de-risk in an unliquid market decline? No. I don’t want to be part of that crowd.”

In the logic of contrarian investing, this kind of pessimism encourages Mr. Birinyi. “Market sentiment has not reached irrationally positive levels yet,” he said. “That implies to me that the market is still grounded, and that it can keep on rising.”

Article source: http://www.nytimes.com/2013/03/06/business/investors-quandary-get-in-now.html?partner=rss&emc=rss

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First: Inflation and Economic Hooliganism

May 15, 2011 by Leave a Comment

Today, by contrast, the picture is full of seeming contradictions. Are we in a runaway boom, or is growth weak? Is inflation low, or is it spiraling out of control? The answer to all of these questions is yes. China, India and Brazil are growing much too fast for comfort; America, Europe and Japan remain depressed. Inflation is running high in the emerging world, while the prices of oil and food, which are determined in global markets and are largely driven by demand from those emerging nations, have soared; but underlying inflation in the wealthy nations remains low.

In short, at this point we’re living in a world that is characterized not so much by the sum of all fears as by some of all fears. Whatever you’re afraid of, be it inflation or unemployment or fiscal crisis, it’s happening somewhere — but the problems are different in different places.

The important thing to realize is that this kind of two-speed world, with booms in some places and continuing slumps in others, was to be expected in the aftermath of a financial crisis that inflicted huge damage on many, but not all, major economies. And for those countries that were damaged — America very much included — here’s a piece of advice: focus on solving your problems, not other countries’ problems.

But before we discuss solutions, let’s consider how we got into this mess.

The global financial crisis of 2008-9 had its roots in more than two decades of growing complacency in wealthy nations, a complacency whose main financial manifestation was ever-growing leverage. Bankers and households alike piled on levels of debt that would have been sustainable only if nothing ever went wrong. Inevitably, something did — and a result was to force much of the advanced world into a harsh process of deleveraging, of slashing spending to pay down debts.

When everyone is trying to pay down debt at the same time, you get a depressed economy — after all, my income comes from your spending and vice versa, so if we’re all trying to spend less, we all end up with less income. And investment opportunities dry up along with output and employment: why should businesses add capacity when they’re not using the factories and office buildings they already have?

But if that’s the story of our economic woes, what’s with the booms and inflation out there? Well, not everyone was caught up in the same cycle of complacency and comeuppance as we were. Emerging nations — and in particular, the BRICs (Brazil, Russia, India, China) — have followed a very different trajectory.

Emerging economies never had the luxury of complacency. The decades before the storm were a time of relative economic calm in America and Europe, but it was an era of repeated crises in the developing world: the Mexican crisis of 1994-95, the Asian crisis of 1997-98, the Argentine crisis of 2001-2 and more. And this history of crisis fed a mood of caution, both on the part of governments — which paid down their debts and accumulated huge reserves — and on the part of the private sector, where debt-equity ratios and other measures of financial fragility fell sharply from 1998 onward.

As a result, by the time the big crisis in wealthy nations struck, emerging economies were far less vulnerable to disruption than they were in the 1990s — and, as it turns out, far less vulnerable than many advanced economies. In the panicky months after the fall of Lehman, past prudence wasn’t enough to insulate countries from the global recession. But once the free fall ended, the emerging world staged a strong recovery, even as advanced economies struggled.

In fact, once the acute phase of the crisis was over, the difficulties of advanced economies actually had the effect of promoting growth in the emerging world, as investors — finding few good opportunities in debt-burdened wealthy nations — began funneling money into up-and-coming economies, turning those economies’ recoveries into runaway booms.

These booms are, in turn, causing inflation to rise in the emerging world. China and India grew more than 10 percent last year, Brazil more than 7 percent. These economies are overheating, and inflation is the natural result.

Paul Krugman is a Times columnist and the winner of the 2008 Nobel Memorial Prize in Economic Science.

Article source: http://feeds.nytimes.com/click.phdo?i=46ec330884d8d24075b98b362d7e878f

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Markets Losing Faith in Portugal

May 5, 2011 by Leave a Comment

While all three countries will benefit in the short term from the loans coming from the European Union and the International Monetary Fund, their ability to continue to raise affordable short-term funds from international investors is considered crucial. Interest costs have soared for Greece and Ireland as many investors expect the tough austerity measures included in their rescue packages will actually deepen the countries’ economic slumps and make it even harder for them to balance their budgets and repay their debts.

Portugal’s ability to secure more relaxed deficit targets from the I.M.F. — 5.9 percent of gross domestic product this year as opposed to an earlier promise from Lisbon of 4.6 percent, and 4.5 percent in 2012 compared with an earlier pledge of 3 percent — suggests that concerns are building in Washington and Brussels that too much austerity could have a detrimental effect.

Greece, for example, has had an extremely difficult time meeting the deficit targets mandated by the I.M.F. as its economic downturn has deepened. Despite a small export boomlet, Ireland, meanwhile, has seen little sign of a recovery in domestic demand. Portugal’s economy is expected to contract this year and next, which would be one of the longest recessions in Europe. Hampered by an uncompetitive export sector, its return to growth will most likely be long and slow as interest rates in Europe are poised to rise.

Under the three-year financial assistance package, 12 billion euros, or about $18 billion, will be channeled as new capital to Portuguese banks that have been shut out of the financial markets for more than a year because of investors’ concerns about Portugal and other suffering euro economies, according to a draft of the agreement published on the Web site of Expresso, a Portuguese magazine.

In return for the aid, Portugal has committed to the sale of state-owned assets aimed at raising 5.5 billion euros. It intends to sell shares before the end of the year in EDP, the energy company, and TAP, the flagship airline.

The aid program also foresees Portugal raising sales taxes on goods like cars and cigarettes, while cutting corporate tax exemptions and public subsidies to private companies. As part of an overhaul of labor legislation, severance payments will be reduced, while unemployment benefits are expected to end at 18 months rather than three years.

Among measures to cut the public sector wage bill, the government will reduce staffing of its central administration by 1 percent a year between 2012 and 2014, and by 2 percent for regional and local administrations. The reductions will take place by natural attrition.

Marie Diron, a senior economic adviser to Ernst Young, said the package was “surprisingly light on fiscal measures, probably reflecting the fact that Portugal already had significant plans in place and that further tightening measures would face decreasing returns.”

The draft agreement, however, did not specify the interest rate payable on the money lent to Portugal, making it difficult to assess a claim by Prime Minister José Sócrates late Tuesday that his government had negotiated “a good deal that defends Portugal,” as well as better terms for its bailout than those accepted last year by Greece and Ireland. The government is expected to confirm the terms Thursday.

The $115.5 billion rescue package, or 78 billion euros, was in line with estimates made last month by senior European officials of what Portugal would require. “The size of the package signals the determination of the E.U. authorities to ring-fence problems in the periphery, especially given the elevated market concerns about Greece and subsequent contagion risks that could arise from that,” analysts at Barclays Capital wrote in a research note Wednesday.

Mr. Sócrates resigned in March after Parliament refused to endorse his proposals for additional austerity measures. To break the political deadlock, Portugal is set to hold a general election June 5. Mr. Sócrates is leading a caretaker government in the meantime.

Some analysts, meanwhile, poured cold water on the favorable comparison drawn by Mr. Sócrates with bailout packages for other countries. With an election ahead, Mr. Sócrates is hoping to reap political benefit from negotiating a bailout, even as center-right opposition parties are blaming him for the problems that have forced Portugal to seek a rescue in the first place.

Mr. Sócrates “may have gone too fast in going public on the package, sidelining the opposition and spinning his role in the negotiations as a protector of his electoral base,” Gilles Moec, an analyst at Deutsche Bank, wrote in a research note Wednesday.

The caretaker government officially asked for assistance last month after failing to meet its 2010 deficit target and after a series of credit rating downgrades pushed Portugal’s borrowing costs to record highs. Those developments heightened concerns about the country’s ability to meet refinancing obligations.

Stephen Castle contributed reporting.

Article source: http://www.nytimes.com/2011/05/05/business/global/05portugal.html?partner=rss&emc=rss

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