Japan raised its consumption tax from 5% to 8% Tuesday in a move that could spell trouble for the world’s third largest economy, which has been trying to revive itself after 20 years battling deflation, stagnation and serial recession.
After undergoing massive monetary stimulus almost one full year ago under Prime Minister Shinzo Abe, a program dubbed "Abenomics," Tokyo’s exchanges have been the worst performing major market indices of the year. Japan's Nikkei 225 index (^N225), for example, has fallen nearly 9% this year, after climbing a stunning 57% in 2013, the largest annual rise in more than four decades.
Yahoo Finance's Mike Santoli says Abenomics initially worked because it boosted equity prices but the market has stalled now that "the hot money that found Japan has exited."
Santoli says data shows the corporate sector doesn't see good things ahead in part because of the higher consumption tax. The increased VAT tax is an attempt to rein in public debt and is the first such increase in 17 years.
"The tax increase could be very dangerous," Financial Times Asia Editor David Pilling told The Daily Ticker in March. Japan wants to "prompt consumer confidence, consumer spending, demand. You would have thought if that's your policy the last thing you want to do is take 3% out of people's pockets."
Check out the video to see what this means for Japan's markets and U.S. investors.
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