With the sales tax hike looming in Japan come April, how will it impact the overall economic growth going forward?

The first sales tax hike in approximately two decades or so will soon be fully put in place in Japan come April 01, 2014 when the consumption tax rates will increase from 5.0 percent to 8.0 percent. There have been many uncertainties regarding the overall direction of the Japanese economy. The questions regarding uncertainties, or whether Japanese policy makers are ‘shooting their own feet’ by implementing this sales tax hike plan, while also trying to encourage businesses and consumers to spend, dine, and buy more domestic goods.

Bloomberg News reported on March 28, 2014 that the Japanese government is expected to speed up the deployment of government cash in the coming months as a surprise drop in consumer spending during the month of February has been quite disappointing, and the attempts to boost inflation expectations are showing signs of impact to the consumer purchasing behaviours.

Bloomberg News quoted Finance Minister, Mr. Taro Aso, that recent data have shown that a slowdown in consumer spending which could be attributed to the sales tax hikes in April. The Japanese parliament has just passed its first budget bill totalling approximately 1.2 trillion Japanese Yen currency in order to prevent any potential economic fallout from the first sales tax hike in two decades. The Japanese policy makers been quite concerned with the potential short-to medium term drop of the sales tax hike, and will Japan return to the deep recession levels in the 1990s if the economy continues to suffer from the consequences of the decision to raise the sales tax? There cannot be any backtracking of the latest measures to increase the sales taxes, as the country is mired with high debt ratios relative to the overall Gross Domestic Product (GDP), current account deficits, and a deeply weakened Japanese Yen currency, around 101.00 to 102.00 to the US Dollar.

The Bank of Japan (BOJ) has been urged to do more to prevent any pitfalls surrounding the tax hikes, but I believe that it is limited in terms of its capabilities, as they are only responsible for monetary policy. While there is a firm mandate to target core inflation levels, excluding food and energy, to be 2.0 percent, come 2015 when the next sales tax hike to 10.0 percent is expected, but so far, consumers have not been moved largely because of the expected drop off in spending levels as the sales tax hikes loom. Inflation expectations appeared to be not on many Japanese consumers’ minds, and it is rightly so as wages have been quite depressed until recently when several Japanese multinational corporations have started to announce wage hikes in order to cope with the sales tax hike in April. However, these moves might have been quite late, and not enough to trigger any changes in the most of the consumers’ purchasing behaviours. The costs of energy consumption have taken up much of their household budgets, and with the sales tax hike, it might even drive consumer debt levels further upwards, which the Japanese government is trying to prevent any further spikes in household and government debt levels.

According to the data, household spending declined by 2.5 percent in February from a year earlier, which is one the first declines in six months, compared to median estimate for a 0.1 percent increase. Retail sales slumped, while core inflation levels rose. Although demand for workers have been increasing with the approaching college graduation season, it is not expected to make much of a difference if wages remained largely stagnant, and energy consumption costs are taking a toll of the average household budgets. These impacts are seen as counterproductive, as policy makers are trying to roll out measures in order to cushion the fallouts, while not aggravating the overall government debt levels.

The case of Japan as a ‘one hit, one wonder’ story following Prime Minister, Shinzo Abe’s appointment in early 2013, and his style of economic planning known widely as ‘Abenomics’ is being put to test in these trying times. The Japanese economy did show some positive signs of recovery in 2013 as ‘Abenomics’ was touted as a radical move to revitalise the Japanese economy, but if one were to take a look at what’s happening now, it does show that these economic reforms, Fiscal, Monetary, and Structural, are posing challenges, and perhaps threats to the overall direction and sustainability in terms of continuing economic growth momentum in Japan.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

This entry was posted in Timizzer by Hock Meng Tay - Chief Editor, Asia-Pacific Region. Bookmark the permalink.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

LEAVE A COMMENT