Asian stock markets posted some green on Monday, in response to a positive rally on Wall Street last week. This is despite rumors that the Federal Reserve is on the verge of increasing interest rates again. But these gains did not extend to Japan. Japan's Nikkei actually posted losses on Monday, on the back of reports that Japan's Finance Ministry will soon increase sales tax.
Japanese companies had been hoping that the Japanese Ministry of Finance would not go ahead with its proposed sales tax increase. But their hopes were dashed last week. On Saturday, Taro Aso, Japan's Finance Minister told Jack Lew, US Treasury Secretary that Japan would increase sales tax soon.
This is unexpected news because there were credible reports some time earlier that Prime Minister Shinzo Abe had deferred the tax hike, to assuage weak market sentiments. Senior Investment Strategist Norihiro Fujito says, the market was 100% sure the sales tax hike had been deferred.
Japanese manufacturing is in the grip of a crisis
Japanese exports have come down by 10% over the last year (April 2015-2016). The Nikkei-Markit purchasing managers' index fell to 47.6 percent in May. It has not been this low since December 2012. The PMI measures manufacturing activity from one month to another. When the index is above 50, it means the manufacturing is growing. If it falls below 50, it signals a contraction.
The decrease is blamed on tapering demand from China and other emerging markets. Another reason cited is a series of big earthquakes on the southern Japanese island of Kyushu. The island is a large manufacturing hub. As a result, production, as well as new orders have fallen sharply. The only silver lining is that Japanese imports have reduced. This has tempered the shock of reducing exports a bit, boosting Japan's trade surplus.
Japan might go for fresh fiscal stimulus to boost manufacturing
Japanese manufacturing has reduced at its fastest rate in three years, on the back of a slump in new orders. As a result, analysts have predicted that Japan might go for fresh fiscal stimulus to give a boost to the flagging economy. It is also possible the markets are spooked by fresh rumors that the Federal Reserve may increase interest rates as soon as next month.
At the same time, the US has warned Japan against intervening in the currency market, a la China (China recently depreciated its currency to cope with falling exports). The warning was delivered at the recently concluded meeting of finance ministers of the G7.