Sales tax increase in Japan(Revised)

The Wall Street Journal introduced an interesting story of Hideo Noda, an ordinary Japanese office worker, who recently went shopping spree. The reason why he was hurried buying expensive smart phone and other stuffs is to avoid paying more sales tax. Japanese government raised sales tax rate to 8% from 5% in this April. My question is whether it is the appropriate time to raise sales tax now in Japan.

I worry that this increase of sales tax is very likely to weaken Abenomics to stimulate Japanese economy. As tax increases, disposable income decreases and consumption will also decrease. The Wall Street Journal also pointed out that, in the past, Japan already experienced serious decrease of consumption due to the increase of sales tax. In 1997, Japanese government increased sales tax rate to 5% from 3%, and this hurt consumption along with the effects of Asian financial crisis.

The main reason for the increase of sales tax is to reduce huge pile of Japanese government debt, which is more than double of its GDP. As we can see from debt crisis of some peripheral euro countries, debt crisis severely hurts economy. Credit rating agencies also has kept pointing out debt problem as a major negative factor in Japanese economy.

debt

But, I think that more urgent issue for the Japanese economy is to escape from deflation and stimulate consumption rather than to reduce government debt. With aggressive economic policy aka Abenomics since end of 2012, Japanese economy showed some signs of recovery. However, unemployment rate in Japan still seems to be over natural level and CPI is also still very low as shown in the below graph. So, economy surely needs to be supported more by strong stimulus policies.

cpi umemployment

Also, Japanese government should focus on stimulating the consumption more because, in spite of sharp depreciation of real exchange rate induced by Bank of Japan’s easy monetary policy, net exports does not respond much to this. In the meantime, consumption is becoming more important as share of house consumption in GDP keeps increasing trend in the below graph.

current account exchange rate

household consumption

Also, in spite of its huge size, Japanese government debt does not seem to be an immediate threat to Japanese economy. It is known that, in Japan, majority of government debt is held by its own people not by foreign lenders. Outstanding international public debt securities to GDP keep decreasing. So, Japanese government debt is more stable than other countries’ debt which have large share of foreign lenders. Furthermore, Japan is the second largest reserve asset country in the world after China with more than one trillion dollars of reserve asset. I think that Japan can wait for more favorable time to manage its debt problem more effectively.

reserve

When solving problems, we need to start to address the most urgent issue first and then move to other issues. Considering current economic situations, keeping economic stimulus is more urgent and timing of raising sales tax is not right.  Japanese government can solve government debt problem more effectively when economy is in better shape. They can raise tax more easily with less damage on the consumption and general welfare of its people after economy gets better.

Some criticize Abenomics for its easy money policy. Also, export competing countries with Japan complain about its easy money policy and depreciation of Japanese Yen. But, I think this Abenomics is quite reasonable policy choice from the perspective of Japanese government. So, I worry that this tax increase may cause more harm than good for Japanese economy weakening Abenomics.