Japanese income tax cut sends surge through Asian markets

Spurred by accusations that Japan was doing too little, too late, to put its economic house in order, the government yesterday announced an unexpected $15.7bn cut in personal income taxes. Stephen Vines in Hong Kong examines whether the package will succeed in stimulating the economy.

The announcement, made by Ryutaro Hashimoto, the Prime Minister, created a surge of enthusiasm in Japan's financial markets which quickly spread to other markets throughout Asia.

"I have decided to carry out a special income tax cut as an emergency measure," said Mr Hashimoto, adding, "I think these steps will make the economic recovery trend stronger".

Japan has yielded to both local and international pressure to take measures which will stimulate domestic demand and put new life into the languishing economy. This has meant relaxing the Hashimoto government's commitment to tight monetary policy.

The previous day the government had launched a trial balloon, indicating that the tax cuts would be far lower but the response was dismal.

Investor response was rapid. The Nikkei 225 share index surged by more than 5 per cent but fell back to a 3.6 per cent rise by the time trading closed. The tax cut also gave an impetus to the Japanese yen, which closed at Y127 to the US dollar, a gain of almost 4 per cent. Traders believe that some of this rise can be explained by Japanese central bank intervention in the market.

Although investors have registered their backing for the loosening of the monetary reins, it is far from clear whether this move will provide the required economic stimulus. "The potential impact on the economy is fairly limited," said Goldman Sachs chief economist Tetsufumi Yamakawa. "It is unlikely to be spent for consumption. It is more likely to go for saving."

These doubts were largely cast aside in other Asian markets which are starved of positive news and will grab any that comes along.

The Malaysian, Philippines and Singaporean currencies were lifted from lows hit earlier in the week. Other Asian currencies, notably the new Taiwan dollar, made gains. It appears that central banks across the region took the signal from Tokyo as an opportunity to help along the timid upsurge of confidence by intervening in the foreign exchange markets to bolster their currencies.

The only weakness was seen in South Korea, where the won fell after a two-day rally. The Seoul stock market was also weaker as investors waited cautiously for the results of today's presidential election. All three candidates are theoretically committed to implementing the International Monetary Fund's tough demands for its rescue package. However, they have, to varying degrees, also made pledges on the economy which can only be fulfilled by defying the IMF.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Recruitment Genius: Outbound Sales Executive - OTE £25,000

£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Day In a Page

Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project