Japan: Japan Sales Tax Rise Confirmed

Japan

The government took a small step forward in its plan to reduce Japan’s debt burden after it proceeded with a much-discussed sales tax increase earlier this month. The levy, which will be implemented in April 2014, will increase from the current 5% rate to 8%. This is the first major tax hike since 1997 when the economy faltered under muted consumption and soft external demand. In order to avoid a repeat of that, the government unveiled a ¥5tn stimulus package (to be finalised in December 2013) alongside the tax hike which includes public works spending as well as tax breaks for companies and homeowners. While this is slight progress, more radical structural reforms under Abe’s final “arrow” are required to support Japan’s long-term growth prospects. Still, it is hoped that these measures will prevent the tax from completely negating recent gains in growth and inflation. Indeed, the latest Bank of Japan quarterly Tankan survey showed widespread improvement in the corporate sector after the sentiment index jumped to +12 in September from +4 in June. On the output side, despite industrial production falling by 0.7% (m-o-m) in August following hefty gains in the previous month, there is still a clear upward trend in industry. For example, the PMI manufacturing headline index edged up to 52.5 in September from 52.2 in August, marking the fastest pace since February 2011 and highlighting the firmer economy backed by rising exports and domestic demand.

August inflation saw its biggest annual rise since November 2008 after increasing by 0.8% (y-o-y). However, much of the gain was driven by the rising cost of imports as a result of the steep depreciation in the yen. With this in mind, our panel still expects only slight inflation this year.

 

You can download a sample of Consensus Forecasts G-7 and Western Europe at www.consensuseconomics.com.

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