A further sales tax hike could be problematic for Japan

Last week on Friday, the BOJ (Bank of Japan) downgraded its prospective view on the economy. There have been numerous factors that initiated this downgrade, the main reasons were due to the sales tax hike and weather. Nature has not been on Japan's side, typhoons and heavy rainfall will have a negative impact on household spending, which contributes to growth. In addition, the sales tax hike has contributed to weak household spending. A lack of household spending contributes to slower growth. As we can see the tax hike is proving to be very heavy for the Japanese economy. This December, Shinzō Abe (Prime Minister of Japan) will make a decision on whether the sales tax will be further hiked from 8% to 10%. It's looking very unlikely as household spending is stalling and a further sales tax hike in October 2015 will make the recovery very unstable. On a separate note, the three arrows fired by Shinzō Abe have not had an effect at all. Inflation is rising faster than wages signalling that growth is likely to be further subdued. This week is generally very calm for Japanese data apart from national core CPI y/y (Forecast: 3.2%, Previous: 3.3%, 26/09/2014) which we expect to be on forecast.

The US recovery is very strong, recent data also suggest this such as unemployment claims (Actual: 280K, Forecast: 312K, Previous: 316K, 18/09/2014). The drop in unemployment claims have signalled that the labour market is tightening, which Janet Yellen (Chairwoman of the Federal Reserve) wants. Declining unemployment is one of the catalysts that will increase the likelihood of an early interest rate hike. However, it is important to note that the Fed should be careful if they increase interest rates, as they could move further away from the 2% benchmark set by the Fed. Currently, the inflation rate is not picking up as shown by recent data (CPI m/m (Actual: -0.2%, Forecast: 0.1%, Previous: 0.1%, 17/09/2014) and Core CPI m/m (Actual: 0.0%, Forecast: 0.2%, Previous: 0.1%, 17/09/2014)). So increasing interest rates too early could derail the current recovery. This week is a very busy week for the US, there is a tremendous amount of data coming from the US. The most important pieces of data are core durable goods orders m/m (Forecast: 0.7%, Previous: -0.7%, 25/09/2014) and final GDP q/q (Forecast: 4.6%, Previous: 4.2%, 26/09/2014) which we expect to be on forecast/better due to the current strength of the recovery. In addition, we expect unemployment claims to be on forecast/lower (Forecast: 294k, Previous: 280K, 25/09/2014) due to improving labour market conditions.