The research team at Nomura suggests that US fiscal policy can have a major impact on the Japanese economy, and the current focus of attention is on when the Trump administration can come up with a bill to cut taxes that has a realistic chance of being enacted.
Key Quotes
“A plan to cut taxes that was proposed by the White House on 26 April was short on detail and therefore had few implications. We think the White House and senior congressional Republicans are likely to produce detailed proposals for tax cuts in the next few months, but we will need to see whether these are acceptable to a majority of House Republicans. Our view is that a bill will eventually be enacted that provides for modest and time-limited tax cuts. To be more precise, we think that any such tax cuts are likely to be only a third as much as those proposed by senior House Republicans in 2016. However, in view of the market's reduced expectations of the Trump administration's ability to deliver acceptable policies, even tax cuts that were only a third as much as those originally proposed might still be seen as positive.”
“What matters as far as the Japanese economy is concerned is the extent to which such tax cuts boost real growth. If they boost US growth by encouraging capex, the Japanese economy should benefit from increased exports. However, if, as we expect, fiscal stimulus in an economy that is already at full employment makes it more likely that the Fed will tighten monetary policy and a sharp rise in interest rates offsets the economic boost from fiscal policy, the result is unlikely to be much of a boost to the economy. If President Trump finds himself unable to deliver the "massive" tax cuts he promised during his election campaign, he may take a tougher line on policies in areas where he does not need congressional approval (eg, immigration and trade).”
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