Macroscope | Glaring divergence in monetary policy between Japan and the United States becomes ever more apparent

Last month’s drift lower in the value of the Japanese yen versus the US dollar may not be over. The glaring divergence in monetary policy between Japan and the United States becomes ever more apparent even as both Tokyo and Washington are both heading, if in different ways, towards stances on tax that are more fiscally expansive.

In Japan’s case, the decision of Prime Minister Shinzo Abe to call a press stud Lower House election for October 22 has not only resulted in a reconfiguration of Japan’s political landscape but also resulted in a recalibration of intentions with regard to a hike in the country’s sales tax that is currently expected to occur in a year’s time.

While, if re-elected, Abe still plans to raise Japan’s sales tax to 10 per cent from 8 per cent in October 2019, the money raised, which had originally been earmarked for debt repayment, will now partly be deployed to finance investment in education and child care projects.

Yuriko Koike’s newly formed Party of Hope, Abe’s main opponent following the implosion of the Democratic Party of Japan, has already ruled out raising the sales tax rate and would therefore forego the revenue that could have been used, even in part, to reducing the size of Japan’s mountain of government debt.

It remains to be seen whether either set of proposals play well with investors.