Japanese Yen Rebounds Amid Sales Tax Hike, Renewed Safe-Haven Status

The Japanese yen is rallying against most major currency rivals midweek as the world’s third-largest economy implemented a long-awaited sales tax hike. This comes as Wall Street is forecasting the yen will enjoy a monumental rally to finish off the year amid the chaos unfolding in global markets. Are investors dismissing the weak data this week?

On Tuesday, Tokyo raised the national sales tax from 8% to 10%, the first hike since 2014. The increased levy will cover most goods and services, including clothes, electronics, medical fees, and transportation. To offset the potential damage, the federal government also offered a myriad of goodies, including tax breaks for automobile and home purchases, a rewards program for credit cards and cashless purchases, and a one-time payout to low-income seniors. The tax for food remains unchanged for low-income households.
Prime Minister Shinzo Abe, who has delayed the increase twice since rising to power, believes it is necessary to cope with the country’s diminishing fiscal situation. Because the population is aging and shrinking, social security reforms are necessary, he told reporters. Abe says this is the first major step to ensuring that “everyone is covered” and â€œthat all generations from children to senior citizens can feel secure.”
Still, experts say this will place a significant strain on spending, which is already lackluster. It is estimated that the sales tax jump will place an additional burden on households by $18 billion. Interestingly enough, August retail sales soared 4.8%, up from a decline of 2.3% in July, which is being attributed to consumers trying to save money before the increase.
The announcement coincides with disappointing economic data.
August industrial output tumbled 1.2%, housing starts year-on-year fell 7.1%, construction orders YoY in August cratered 25.9%, and the August unemployment rate was unchanged at 2.2%. On Wednesday, September consumer confidence dipped to 35.6, down from 37.1 in the previous month.
Meanwhile, with the turmoil impacting international financial markets and the global economy, analysts are penciling in a huge rally for the yen. To close out 2019, the yen is anticipated to advance 2.9% against the US dollar. So far, it is just behind the Canadian dollar in gains against the greenback this year.
Hans Redeker, the global head of currency strategy at Morgan Stanley, told Bloomberg:

The global environment is in what we describe as an â€˜unstable equilibrium’ and we think this is going to cause volatility and a setback in risk assets. All that is going to lead to yen strength.

The USD/JPY currency pair declined 0.52% to 107.21, from an opening of 107.74, at 19:11 GMT on Wednesday. The EUR/JPY slipped 0.24% to 117.49, from an opening of 117.79.

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