Japan Scraps Consumption Tax
May 31, 2016
Dennis Gartman is editor and publisher of The Gartman Letter, and strategic advisor of the AdvisorShares Gartman Currency Hedged Gold ETFs (GEUR & GYEN). He regularly contributes to AlphaBaskets and lends his institutional insight to educate advisors and investors about commodities and the forex markets, including about trading gold in different currency terms.
The US dollar is correcting a bit of yesterday’s strength and as almost everyone should know of course that previous strength evolving late Friday and into yesterday’s holiday was derived from the “chorus” including the Fed Chair, one or two of the Fed’s Governors and several of the regional Federal Reserve Presidents informing the markets that higher rates are only a short while off into the future. The overnight fed funds rate is going to move higher; the only question is whether it shall be at the June or the July meeting. The dollar was therefore quite strong yesterday and today’s weakness is indeed very modest when compared to that strength. We see today’s dollar “weakness” then as merely corrective and we certainly believe that the dollar has broken out to the upside relative to the Japanese Yen following reports over the weekend that the Abe government is fully considering delaying… really, rather effectively ending… the imposition of the increase in the consumption tax that was to have gone into effect one year hence. The imposition of that tax would only have insured that the prolonged economic weakness in Japan would continue apace. Although Japan’s debt/GDP ratio is without the question the most egregiously large and certainly the most preposterously overextended of all of the ratios of the G7 nations, it needs not to impose a tax increase in an attempt to turn that ratio lower for past tax increases have served only to see the ratio widen instead.
Mr. Abe, apparently, will make the official announcement of the consumption tax delay… which is now expected to be delayed for two and one half years at least… this evening (Wednesday morning in Japan). As noted here yesterday, Mr. Aso, the Finance Minister, has suggested that Mr. Abe make this statement along with a call for a special election for both the Upper and the Lower Houses of the Diet, so as to make certain that the decision to delay the consumption tax increase has a clear mandate. Japan’s Upper House is due for election in July, and Mr. Aso simply wants both houses to be elected simultaneously. At this point, Mr. Abe has not given the world any indication that he is prepared to call for a broad, upper and lower house vote, although given his level of public support… the highest for any Japanese Prime Minister this far into his tenure in office since the inordinately popular Mr. Junichiro Koizumi… certainly we’d not be surprised were he to make that call.
Regarding the liquidation of “spec” positions, open interest on the COMEX has plunged these past several days, with the open interest on Friday falling another 2.0%. Our only strong point is that having owned gold in EUR and/or Yen denominated terms has served us reasonably well over the course of the past several weeks and certainly it has served us very well over the course of the past year in EUR terms and the past three years in Yen terms.