JAPAN FACES RISK OF RECESSION AS CRITICS BLAME LATEST ROUND OF ABENOMICS
▶ A sales tax increase to put funds aside for an ageing population has seemingly damaged the overall economic picture
Japanese housewife Matsuko Mitsui, 64, had been meaning to buy a new air conditioner for years, but it took the looming sales tax hike in October to spur her to finally make the purchase.
Like many people in the country, she is not 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 scrutinise the price tags,” Ms Mitsui says. She is not 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 meagre wage gains.
Japan saw an annualised 6.3 per cent economic contraction in the last three months of 2019, fuelling 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 Mr 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 such as Ms 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 towards reflation, they say.
“There is absolutely no reason to raise the sales tax.
Absolutely no need,” says Takuji Aida, chief Japan economist at Societe Generale. “It’s described as a tax increase in preparation of further ageing, but the government is not a household. Just because you’ll need money later, does not 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 had not meshed well with the goal of sparking higher prices, higher wages, higher consumption and higher growth.
So the government came up with a range of ideas to support demand and limit the effect of the tax this time around. But those measures, including rebates on cashless payments that mystified older generations, failed to prevent an 11 per cent quarterly slide in consumption after the tax. It is increasingly clear that the sales tax hit is not 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, annualised 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.
Mr 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, with fears the Olympics may even be postponed because of the outbreak.
“The timing was terrible,” says Harumi Taguchi, a principal economist at IHS Markit in Tokyo on the October hike. Given the residual effects from the China-US trade war, the fall in production and struggling wages, more direct fiscal support was needed at the time of the tax hike, she says.
Mr 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.
In a country where the working age population is set to shrink by more than a third between 2015 and 2060, there is a clear need for more revenue to pay for medical, pension, welfare and elderly care bills that have already been rising at a steady clip for decades.
Even with the short-term blows to the economy, overall tax revenue has mostly increased after each previous hike, though the goal of balancing the budget looks as elusive as ever.
So unless strong economic growth can push up corporate and income tax revenue, further sales tax hikes cannot be ruled out.
“If ageing is going to continue and Japan is going to repay its debts, we cannot avoid increasing taxes,” says Yasunari Ueno, chief market economist at Mizuho Securities. “There is the matter of timing, but I support raising the sales tax.”
For younger workers, that means higher taxes loom. Momoko Oda, 31, a translator living in the outskirts of Tokyo, is among those who will have to shoulder the costs of an ageing society as the years go by.
“It does feel unfair, but what can you do?” she says, noting the growing number of people relying on their pensions.
“It’s not as if I even have great expectations for my own pension. I’m making my own plans since I expect to get barely anything anyway.”