A few weeks ago, Japanese Prime Minister Shinzo Abe announced his intention to reduce corporate tax rates in Japan in order to stimulate private-sector investment, with the hope of creating economic growth.
A few days ago, the details of the plan were released, and the big issue is the intention to phase in lower corporate tax rates from the current level of about 36% to below 30% over several years, starting next year.
This is known as the "third arrow" of "Abenomics," the name given to the totality of economic and financial policy prescriptions being pursued by Abe in an attempt to reverse two decades of deflation and economic stagnation. The first two arrows, massive monetary stimulus and fiscal spending increases, have already been implemented.
There won't be a fourth arrow, and that's important for investors to know. These three main policy tools are all there will be. There may be some follow-up marginal changes or other ancillary issues such as immigration reform, but the launching of the third arrow marks the beginning of the last substantive policy option available to the country.
The reason for phasing in the corporate tax cuts over years instead of all at once is an attempt to provide investors, both foreign and domestic, with hope that all three arrows will eventually reverse the economic trajectory and, most importantly, cause economic activity and tax receipts to increase faster than sovereign debt service.
The reality, however, is that these measures won't work, because the sovereign debt level as a percentage of GDP and the tax receipts required to service it are now beyond the ability of any change in monetary, fiscal or tax policy to reverse. Over the past several years, I've written several columns about why this is the case.
The policy changes being implemented now are following the logical path I've written about as well. Throughout this process, including multiple actions taken by previous Japanese government administrations, there has always been the hope that some new policy or combination of policies could and would eventually cause economic activity to increase again and that it would just take time before the right combination was discovered.
The critical point for investors everywhere and in all asset classes to be aware of now is that any reasons to believe or hope that there is a right combination of policy prescriptions that will provide the catalyst for a reversal of the private sector's economic contraction have largely been exhausted.
As the corporate tax cuts begin to be phased in, many people will continue to hold on to the hope of reversal in Japan. At this point, with regard to investors in Japanese equities, I don't know what the response to the implementation of the third arrow will be in the next few years.
Since Abe announced his intention to begin the process of cutting corporate tax rates a few weeks ago, the Nikkei 225 index has increased about 1.5%. Since the plan won't actually begin until next year and then take years to be implemented, there is justification for hope that equities in Japan could continue rising.
But to reiterate what I have said in numerous columns on the subject, it is a mathematical certainty that Abenomics will not only fail to reverse the economic contraction, it will accelerate the real rate of trajectory toward insolvency.
As I concluded this past March in the column "Abenomics' Failure Is the Global Canary," which was written in response to the government announcing a consumer tax increase, investors would be wise to avoid Japan altogether now, and probably permanently.
