"The JGB market is a domestic market and reflects the Japanese consensus, which is that the consumption tax hike won't be derailed"
-Shogo Fujita, the chief Japanese bond strategist at Bank of America Merrill Lynch
In the heated debate over whether Japanese authorities should increase sales tax as the economy is gathering steam, everyone agrees on one thing- a jump in taxes would add more pressure on the Bank of Japan, which is already in the midst of its unprecedented monetary expansion. Nonetheless, the bond market is showing a surprising confidence in Abe's tax plans, even ignoring a latest warning from Moody's Investors Service that it should have a negative impact on the nation's credit. The cost to insure Japanese government bonds for five years dropped 18 basis points since the end of June, hitting 59 basis points last week- the lowest since May 15. Moreover, Treasuries fell 6 to 21 during the same period, while the yield on benchmark 10-year JGB stood at 0.765, the lowest in the world. The confidence in Japanese government's finance should be eroded by the planned shift in fiscal policy and would become a drag on the world's most indebted country, according to Moody's. On September 9 Shinzo Abe will unveil his decision whether to implement a planned 3% boost in the sales tax in April, while Taro Aso, Abe's deputy, already pointed out that the latest GDP figures are supporting the case for an increase. Amid possible options for BoJ to support the economy in case of the tax hike, could be a further increase in asset purchase, while the second option, named by analysts, could a scrap of the 0.1% interest it pays on commercial bank's Yen deposits at the BoJ.
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