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As widely expected, Japan will go through with a plan to raise sales tax in April to 8% from 5%, a move that is set to raise ¥8T.
Prime Minister Shinzo Abe is expected to unveil a ¥5T stimulus package later today to offset the effect of the tax rise. The measures will reportedly include a cut in corporate tax and further public-works spending.
Still, the VAT rise is Japan's first serious attempt in 15 years to rein in its public debt, which recently topped ¥1,000T and is more than twice the size of GDP.
Abe to take with one hand and give back with the other
Japanese Prime Minister Shinzo Abe will reportedly announce tomorrow that he will go ahead with a planned rise in sales tax to 8% from 5%, but he will also unveil a stimulus package designed to cushion the impact of the increased levy.
While the VAT increase is seen raising ¥7.5T for the Treasury, it will spend ¥5-7T on the stimulus measures. Unsurprisingly, there's plenty of noise about the apparent paradox of it all.
The package will include tax breaks for companies but not a cut in income tax, as well as investment in public works and cash handouts to those on low incomes.
Meanwhile, Japan's real interest rates seem to have dropped below zero, with inflation rising to 0.8% in August and the yield on 10-year bonds dropping to 0.69%. The hope is that bond-holders will look for returns by moving out of bonds and into assets such as stocks, loans, property or overseas assets, a trend that will eventually feed into higher prices and further help the battle against deflation.
S&P 500 (SPY) futures -0.8% on mounting concerns of a partial U.S. government shutdown after the House voted to tie federal government funding to a halt on key provisions of Obamacare. Adding to worries is what may be the imminent collapse of the Italian government.
DJIA (DIA) futures -0.7%, Nasdaq 100 (QQQ) -0.6%, Russell 2000 (IWM) -0.9%. Italian FTSE MIB futures (EWI) -1.2%.
Japan's Nikkei is off 2% in the early going and Australia's ASX 200 is down 1%.
Gold's little-changed and WTI crude oil is down 1.1% to $101.72.
"I'm lost ... I don't play when I'm lost," says Stan Druckenmiller, explaining to Bloomberg TV why he doesn't have any big bets going right now. He believes the market is topping right now, but his main focus is on who the new Fed chairman will be, and he's willing to wait a few weeks to find out. The takeaway from that comment looks to mean Druckenmiller will be buying on a Yellen appointment, selling on Summers.
As long as the Fed is printing money, he says, there's no chance of a bear market, but "if you tell me QE will be removed in 6-9 months ... that's a big deal." For those who don' think so, he says, look at June - the mere hint of removal caused havoc. What do you think might happen when tapering actually begins (Has the Ted Williams of global macro forgotten markets anticipate?).
On again, off again short bonds for some time now, Druckenmiller admits to missing the big move down in Treasurys this summer after waiting for it for years.
For now, he's long a few Japanese stocks and short the yen.
Bank of Japan minutes show members concerned about fiscal policy
Taking a page out of the Fed's book, many BOJ board members "expressed hope that the government [will] steadily promote steps to achieve fiscal consolidation," minutes from the central bank's August 7-8 meeting show.
Members also noted that long-term rates remained "more or less flat throughout the intermeeting period."
Nevertheless, "one member pointed out that, if the government's stance in terms of fiscal consolidation were to weaken ... long-term interest rates could rise", hindering the central bank's efforts.
The Nikkei is ahead 2.2% following Tokyo's winning bid for the 2020 Summer Olympics. The news however, will likely boost PM Shinzo Abe's popularity along with the chance of his sales tax increase being implemented next April.
The government also raised its estimate of Q2 GDP growth to +3.8% from +2.6% previously. Consensus forecasts called for a 3.9% increase.
The yen slips half of a percent, with the dollar now buying ¥99.64.
Japan final Q2 GDP: +3.8% versus +3.7% expected and +2.6% preliminary.
As tipped by JPMorgan and UBS last week, the improved GDP number was fueled by a more upbeat read on capital expenditures, which were revised up to +1.3% for the period from an initial reading of -0.1%.
For the first time since May of 2012, Japan's Cabinet Office says its coincident index is "improving", which indicates the government sees "a high likelihood of an economic expansion" based on the composite of 11 key economic indicators.
"The indicators that most contributed to the rise were manufacturing-related numbers, such as industrial output and industrial electricity usage," WSJ notes.
Japan overnight had its biggest gain in a month, the Nikkei +3% to add to Monday's 1.4% advance. The yen has fallen sharply over the past few sessions, with the dollar buying ¥99.29 this morning vs. just ¥97 towards the end of last week. The weaker yen helped Toyota (TM +2.9% premarket) to be the Nikkei's biggest gainer. Kansai Electric soared 8.1% after an expert panel concluded an earthquake fault under the company's Ohi nuclear plant may not be active.
Corporate current profits +24%, corporate sales -0.5%.
JPMorgan and UBS say Q2 GDP may be revised up from a preliminary reading of +2.6% following the capex data, which could make the government more inclined to go through with proposed increases in sales tax. A decision is expected early next month.