Sales tax hike likely to go ahead for Japan, Euro area growing marginally

A few weeks ago, Japan shocked markets by easing monetary policy in a bid to revive its economic recovery. Additional easing was required to achieve the 2% benchmark inflation rate set out by the Bank of Japan. The Japanese economy recorded a contraction of -1.8% growth (07/10/2014) and this has sparked concerns whether Shinzō Abe, the Japanese Prime Minister, will raise the sales tax hike from 8% to 10% in October 2015. The decision as to whether he will approve of this will be made in December 2014. The Governor of the Bank of Japan, Haruhiko Kuroda, would be in favour of this as it will aid the reduction in the fiscal deficit as would the director of the International Monetary Fund, Odd Per Brekk, and the indications are that it is likely to be approved. The BoJ is expected to leave monetary policy unchanged as more data, such as inflation readings, is required for further action.

Recent data suggests that the Eurozone has started to grow as it achieved growth of 0.2% in Q3. The largest contributors to this GDP reading were France and Greece who achieved 0.3% and 0.7% respectively. Greece has exited the recession and is outperforming other countries in the single currency bloc. This shows that the recent additional measures the ECB implemented such as negative deposit rates, LTROs and asset purchases, are working. However, unemployment still remains high and it will take many years for Greece to recover to pre-crisis levels. However, Italy has had a contraction of -0.1% growth which indicates that there is still some imbalance in the currency bloc. One of the major concerns the ECB has had is inflation which has remained below 1% for 13 consecutive months. This has increased speculation that the ECB may employ a QE-style initiative to revive growth and to achieve the 2% benchmark inflation rate it set. A QE-style initiative will lower the value of the Euro making exports more competitive thereby fuelling inflation and growth. Also, with the BoJ easing monetary policy, the Yen has dropped making exports more competitive. The Eurozone will have a tough time competing against Japan, whether or not a QE-style initiative is implemented.