Tag Archives: sales tax

Japan’s increase in sales tax – right decision?

In my previous blog post Japanese economic growth – now time to stimulate export, I wrote about how Abenomics has not been successfully increasing the Japanese export. Furthermore, I was concerned about Japanese economic recovery, as Japan’s recovery is mainly driven from increase in domestic consumption. In April 1st 2014, Japan’s domestic sales tax rose from 5% to 8%, as forecasted in October 2013. Japan’s Prime minister Abe Shinzo’s aggressive monetary policy did help Japan to escape from its continuing deflation, and I am worried if this rise in sales tax will go against Abe’s monetary policy.

According to the Wall Street Journal article Japan’s Sales-Tax Boost Will Test Abenomics, Japanese government’s decision to increase sales tax worries many economists. As it can be seen from the graph below, Japan have once increased its sales tax in 1997 from 3% to 5%. The result was disappointing, as Japan suffered from a decrease in consumption and continuing deflation and recession for more than 18 months. Bank of Japan forecasts that Japan’s Consumer Price Index will be at its steady rise of 1.3% for remainder of 2014 and then reach its target rate of 2.0% by 2015, while private economists forecast that Japan might go back to its long-time deflation, with rate lower than 1%.

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The article from Reuters Abe bets he can break Japan sales tax jinx with April 1 rise points out that the main reason for this increase in sales tax is to curb Japan’s massive public debt. Jesper Kroll, head of equities research at JP Morgan insists that “2014 is not 1997”, saying the probability of success (in rising sales tax) is better than ever. He cited a tight labor market, increased household and small-business burrowing and a $53.44 billion extra budget enacted in last December will cushion the impact of the sales tax rise.

However, I am still concerned about this tax rise. As I have already mentioned in my previous blog post Japanese economic growth – now time to stimulate export, Japan’s economic recovery in 2013 was driven from domestic consumption (not international trade) despite aggressive Abenomics. While Yen is still strong, Japan’s export is unlikely to boost in a huge amount in 2014 as well. Therefore, if Japan’s domestic consumption is reduced due to an increase in sales tax, then it is probable that Japan will be unable to maintain the fast rate of economic recovery from 2013. Therefore, I think it is extremely important for Japanese government to keep an eye on Japanese economy (especially its domestic consumption and CPI index) and execute necessary monetary and fiscal policies if increase in sales tax goes to an opposite direction to where Abenomics is heading.

Japans Down but Not Out!

Despite the Asian market showing promising comebacks, Japan’s Q4 report fell below economist expectations. Disappointing growth figures from Japan’s report showed that GDP only rose 1% as opposed to its anticipated 2.8%. For a country in need of fiscal strengthening and economic growth after years of deflation, this was not the news some hoped for.

Though despite some optimism from economists on Japan’s situation, an increase in the country’s sales tax this coming April from 5% to 8% will further hurt the numbers by contracting spending. So why is Japan increasing their sales tax? They hope that this will cut the nations debt down to size, a priority that the administration put ahead of economic growth. To counteract short run price contraction, Prime Minsiter Shinzo Abe promises more economic stimulus for citizens and businesses. Even with his adminstration’s efforts, economic growth isn’t looking as impressive for a country that has historically been growing very quickly since the 1960s.

 “We need to understand that my administration’s top priority of putting an end to 15 years of deflation is no easy task,” Mr. Abe said earlier on Tuesday. “Furthermore, it’s important to strike a balance between economic recovery and fiscal soundness.” [WSJ]

 “This weak export performance gives us a sense of risk that the Japanese economy may significantly stall after April,” Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, told Bloomberg Television. “Prime Minister Abe really needs to be quick in showing to the market that he can deliver reform.” [Bloomberg]

Japan has low unemployment and is the 3rd largest country in terms of nominal GDP. It’s a leading nation in technological research and has had its economy long driven by exports. Though exports did edge up this past quarter, they were not enough to make up for previous losses. Companies like Nintendo Co., which has not been performing very well with its latest generation console, Wii U. The system has struggled to sell as much as its predecessors hurting exports a bit I presume.

 In 2011, the Tohoku earthquake/tsunami and brought Japan to its knees in trouble. Mass casualties and economic crippling it has been referred to as the toughest, most difficult crisis in Japan since WWII. This was followed by the Fukushima Daiichi nuclear disaster which worried its citizens about their health and safety and is still in the process of reaching full recovery to this day.

I think Japan deserves to make a turn around here. They have faced devastating hurdles such as when the country was hit by tragedy back in 2011. As the largest patent filing, a lot of technological innovation namely with robotics/automobiles/etc come out of Japan. I would look to see Japanese ingenuity and confidence thrive and continue.