Japan’s Finance Minister, Katsunobu Kato, spoke about the government’s reaction to the ruling coalition’s disappointing results in the upper house election. Despite political pressure, Kato made it clear that the government will not lower the consumption tax. Kato emphasized that reducing the sales tax is not appropriate right now. He pointed out the need for fiscal responsibility because of Japan’s high public debt and the potential negative effects on the markets.

Calls For Tax Relief

Following the Liberal Democratic Party’s poor showing in the upper house election, there have been more calls for tax relief. However, Kato said that any government decisions will focus on long-term fiscal health rather than short-term political gains. His statement clearly suggests that there will not be any immediate fiscal support for Japanese consumers. This means that the Bank of Japan will need to step in to provide economic support. We expect the central bank to continue its very loose monetary policy to make up for the lack of government spending. This approach highlights the significant difference in interest rates between Japan and the United States, which mainly drives currency markets. While Japan’s policy rate is close to zero, U.S. rates remain high. This is likely to weaken the yen even more. We will be exploring strategies that can profit from a rising USD/JPY exchange rate.

Impact On Domestic Consumer Stocks

Kato’s position poses challenges for domestic consumer stocks, which are already facing core inflation that has exceeded the central bank’s 2% target for over two years. The last increase in the consumption tax in 2019 was followed by an economic slowdown, so not having relief now could limit growth in the Nikkei 225 index. As a result, we are considering buying put options on the index to protect against slowing domestic demand. The government’s focus on fiscal health makes sense given that Japan’s public debt now exceeds 260% of its GDP, the highest among developed nations. This long-term focus suggests that traders should be cautious about any rallies based on hopes for government aid. We believe that structural factors will likely continue to support a weaker yen and a careful strategy towards domestic stocks. Create your live VT Markets account and start trading now.

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