Bloomberg Japan News:

https://www.yahoo.com/finance/news/history-repeats-sales-tax-hike-200000679.html

Article:

(Bloomberg) -- Japanese housewife Matsuko Mitsui had been meaning to buy a new air conditioner for years, but it took the looming sales tax hike in October to spur the 64-year-old to finally make the purchase.

Like many people in the country, she isn’t planning to splash out again anytime soon, leaving the economy teetering on the edge of recession. And that was before the spreading coronavirus gave yet more cause for caution.

“These days, I really scrutinize the price tags,” Mitsui said. She isn’t her family’s breadwinner, but she says the heightened price consciousness she senses in herself and people like her is linked to the squeezing of household finances by higher taxes and meager wage gains.

Comments and Ideas:

The sales tax was back in October, but seems some want to still keep bringing it up in the news. The second sentence seems to indicate the AC was a one-time purchase, which of course it is/was, but the second sentences makes it sound like this person is not going to spend on anything again.

Another idea is that there is always talk about the Japanese economy always "teetering on the edge of recession." Usually because consumer spending is never what the economy wants or needs. In most advanced economies, such as Japan, consumer spending can be 50 percent of more of GDP. As such, Japan at times, due to it be one of the fastest ageing societies around, with South Korea, being up there too, as both are one or two or two and one etc. being aged societies tend to spend less. Or more specifically as the 65+ age group becomes a larger part of the society and economy, that potentially might mean less consumer spending in the economy, and it might have nothing, in reality, to the sales tax increase.

Yes there is an element of price consciousness, as anywhere in the world, but the 8 percent to 10 percent increase doesn't seem to be much related to everyday household products. Yes for cars, houses etc. it is a big deal, but for everyday things, maybe not so much for most consumers.

And yes, wage gains seems to always be a major challenge in Japan, as the BOJ and the Abe government have been trying to get companies to increase wages to boost the economy, without too much success yet.

Article:

Japan saw a 6.3% economic contraction in the last three months of 2019, fueling criticism of Prime Minister Shinzo Abe’s decision to carry out the tax increase at a vulnerable time for the economy. After factoring in the early signs of impact from the coronavirus, analysts now believe the economy is falling into recession.

The downturn comes at a bad time for Abe, whose support is already falling because of scandals and doubts over his government’s handling of the coronavirus outbreak. Three surveys published last week found the approval rating of his cabinet had dropped.

The logic behind the tax increase is that the government needs more money to provide pensions and health care for the growing legions of elderly like Mitsui, while reining in the developed world’s largest government debt pile.

The thinking of reflationists is that the policy priority should be to ensure a strong growth cycle before any pulling on the nation’s purse strings. A tax increase risks sapping the economy and undoing progress toward reflation, they argue.

Comments and Ideas:

Once again, as has been written in other posts here, the 6.3% downturn is similar to the 2014 Q3 downturn when the sales tax was increased from 5 percent to 8 percent.  It seems, the Japanese economy is always vulnerable, because so much of it depends on global trade and consumer spending. Global trade, and of course the US/China situation, which has eased somewhat, but still a concern, and of course consumer spending is never what the BOJ would like.

There is one thing, one idea, about Japan politics; meaning citizens in Japan prefer stability, even if they don't like the politicians that much. If Abe can continue to provide stability in the economy, there might not be a concern.

Yes the reasons for the tax increase are valid, health care and pensions being a major priority now, and the ever continuing government debt to GDP ration which is the highest in the world, at maybe 250 percent. But its been that way, its seems for 30+ years and the economy is still working.

Again the sales tax increase, saw Q4 consumer spending and GDP decrease, but, with all things equal, and all things considered, taking away the virus situation, the economy should have been able to bounce back to a somewhat normal growth situation. But the virus situation has changed everything.

Article:

“There’s absolutely no reason to raise the sales tax. Absolutely no need,” said Takuji Aida, chief Japan economist at Societe Generale SA. “It’s described as a tax increase in preparation of further aging, but the government isn’t a household. Just because you’ll need money later, doesn’t mean you need that money now.”

The Abe administration had tried to learn as much as it could from 2014, when a slightly larger increase in the tax helped snuff out the initial momentum of Abenomics. A higher sales tax then hadn’t meshed well with the goal of sparking higher prices, higher wages, higher consumption and higher growth.

Japan Leaves No Stone Unturned as It Prepares for Sales-Tax Blow

So the government came up with a range of ideas to support demand and limit the impact of the tax this time around. But those measures, including rebates on cashless payments that mystified older generations, failed to prevent an 11% quarterly slide in consumption after the tax.

It’s increasingly clear that the sales tax hit isn’t simply a problem of a single quarter. Growth figures from previous increases show that the blow to the economy endures.

In the 10 quarters before each tax move and the 10 quarters after the contraction that followed, annualized quarterly growth has weakened by an average of at least 0.5 percentage point after each move. For the 1997 bump, the difference was 2.9 percentage points, though this coincided with the Asian financial crisis and Japan’s own banking sector bust-up.

Comments and Ideas:

Of course there are always differences of opinion on policy and strategy on how to solve different situations or challenges. The sales tax situation is no different. The 2014 sales tax increase, in hindsight, maybe not so good, but it didn't completely stop economic growth. Yes, the goal of higher prices, higher wages, higher consumer spending of course should lead to higher economic growth, with the BOJ has been working on the first three for a while, without too much success, or not as much as they want.

Rebates on cashless payments may sound like a good idea, as more and more of Japanese consumers are now using cards instead of just cash. However, the older generations in Japan, it seems still want to use cash only and maybe something should have been done for them, if it wasn't, if possible, like a sales tax increase of less for the older generations. At least for a while. If at all possible.

Again the 11% probably was not that much different than the 2014 situation. Again it must be noted, Japanese consumers, for the most part, maybe part of culture, are not free wheeling spenders like US consumers or even now Chinese consumers. So it should not be a surprise that spending is/was down after the sales tax increases.

Article:

Bad Moments

Abe likely thought he had found a sweet spot for raising the tax ahead of an Olympic year that would support the economy through extra construction investment and 40 million visitors. But a global downturn, a super typhoon and now the coronavirus have changed the narrative.

“The timing was terrible,” said Harumi Taguchi, a Tokyo-based principal economist at IHS Markit on the October hike. Given the residual effects from the China-U.S. trade war, the fall in production and struggling wages, more direct fiscal support was needed at the time of the tax hike, she said.

Abe’s stimulus package unveiled in December, which notably gave scant mention to the tax increase, was therefore a case of too little, too late. For its part, the Bank of Japan has stayed on the sidelines. Its support for the economy already extends well beyond the measures employed by other major central banks.

BOJ Governor Haruhiko Kuroda, himself a former finance ministry official, has supported the tax hikes of the Abe administration. But with the negative side effects of the central bank’s stimulus building, the BOJ would likely prefer the government to step in first if the economy needs further help.

Comments and Ideas:

Yes, it might have not been not so bad an idea, if you know extra spending, such as construction investment would pick up the slack along with the projected 40+ million visitors.

But then the unexpected hit, with the continued global downturn, the typhoons, and now the virus situation have all changed the outlook. Yes more fiscal support maybe should have been what is/was needed. Especially now, the economy may need both fiscal and monetary assistance in the future. No doubt, as other articles have mentioned the BOJ might not have much in left in tools or strategies to combat the future economic situation.

© 2020, Tom Metts, all rights reserved