Will Japanese Tax Consume the Yen’s Strength?

Woman on Escalator at Midtown Tokyo
B. Tanaka | Photographer's Choice | Getty Images
Woman on Escalator at Midtown Tokyo

A hike in the consumption tax will send the yen lower, one strategist said.

The unyielding strength of the yen has been a source of frustration for Japan for some time. But Greg Anderson, a currency strategist at Citigroup, thinks the Japanese may not have to fret much longer.

The key, he said, is the increase in the consumption tax, which the Japanese parliament passed on Aug. 10.

"It appears almost certain that the tax rate will rise to 8 percent in April 2014 from the current 5 percent," Anderson wrote in a note to clients. "We expect this to cause JPY to weaken throughout 2013, as rush demand ahead of the consumption-tax hike and supplementary budgets cause imports to surge."

Anderson looked back at the currency effects when the consumption tax was first introduced and when it was increased in 1997, and found that, in both cases, the yen weakened against the dollar for about a year. However, while the yen rose ahead of the introduction of the tax, it weakened before the rate was increased. The Japanese economy today is more similar to 1997 than 1986, but Anderson suspects that low U.S. interest rates and the deterioration in Japan's balance of payments will nonetheless send the yen lower.

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