MNI MARKETS ANALYSIS: VAT Plans Raise Focus on Japanese Fiscal

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Executive Summary:

• Financing the JPY5trn food consumption tax suspension with proceeds from the FX special account would likely open up gaps in the general budget
• This leaves the Japanese finance ministry with three options: Plug the gap through increasing the efficiency of the tax base and expenditure, net liquidation of parts of the FX special account, or higher JGB issuance through the backdoor
• Which one of these options it chooses may have substantial consequences for JPY as well as JGB yields. Special account partial liquidation would be a notable JPY positive
• If Japan wants to adhere to its new fiscal rules, its headroom has an upper limit of roughly 8ppts of GDP through 2030 cumulatively