What Happened The Last Time Japan Raised Its Consumption Tax?

Japanese stocks have been bouncing back higher in the last few days as considerably worse data than expected combined with the looming consumption tax hike (which the government has to do to show the market that is, at a minimum, somewhat fiscally responsible) are driving both stocks and JPY to discount a near future dominated by an even bigger stimulus by the BoJ. However, casting a big shadow over all this is what happened the last time Japan raised its consumption tax...


So are we going to get the bounce of euphoria followed by the 40% plunge of reality?

What happened in 1997?
That was the last time Japan raised the consumption tax and it wasn’t long afterwards that the economy slipped into recession.

Of course, the asset-managers are quick to deny any and every possible analog…

“I don’t think 1997 is a good analogue for what is happening in Japan now. There are three key reasons for that,” said Alexander Treves, head of equities for Japan at Fidelity Worldwide Investment.


“The first is that back in 1997, the financial system was in significantly worse shape.
The second is that in 1997 the consumption tax hike took place against a backdrop of the Asian financial crisis and…
the third thing is that the stock market was much more expensive back then,”

So, let’s get this straight… he thinks Japanese banks are in a better financial position currently (totally overbloated with JGBs?), there is no backdrop of an asian financial crisis (umm, look east my friend, China is dead-center on this), and the stock market is cheaper now? (on a fwd P/E maybe but we all know how fast those ‘expectations’ collapse).


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