Abe has delayed the tax hike until 2019 and this has caused the Nikkei to go down over 1.5% yesterday. Today in Japan it seems to be more of the same (this time because of the stronger Yen according to news sources). The new of the delay in the tax hikes was not what most economists were looking for and the markets are in agreement. As stated earlier the delay in the tax hikes is going to be a slow erosion of confidence in the government’s ability to manage the longer term budget. In the meantime the measures taken to stimulate growth could speed up this process as the Government spends more and increases the deficit.
Source: Yahoo Finance
The Central bank is now a major player in the bond market, owning around 37% of the market. As demographics works against the country the BOJ will have to take over the purchasing of bonds from the retirees that become spenders as opposed to savers. This fine balance must be maintained due to the face that there are higher yielding alternatives to make JGBs less attractive to outside investors.
Source: Japan Macro Advisors
The issue with the lack of growth and more stimulus being added to the economy could be a greater budget deficit that will make it harder for the BOJ to absorb the bonds left by the slowing domestic demand and the growing needs to bonds, forcing the bank to increase stimulus alongside budget needs. This would take the monetization of debt a step further to monetization of the budget gap, and potentially turning the Yen and JGBs into the least safe haven.