Japan’s consumption-tax hike doesn’t look like it’s going to sink the economy, as a similar increase did five years ago. That’s the good news.
The bad news is that the bump, to 10 percent from 8 percent, is still happening at an inauspicious time. While a recession isn’t in the cards for Japan, the last thing any major economy needs is a fiscal brake.
Twice Prime Minister Shinzo Abe shied away from the increase. No wonder: A jump in the tax was widely blamed for a recession in 2014. Chastened by that experience, Abe added a raft of exemptions and some spending sweeteners that may help the economy scrape through this time. These include breaks on purchases of cars and homes. Some items, like food, will still be taxed at the old rate, while education will get more funding.
There’s little sign that shoppers are racing to beat the clock before 12:01 a.m. Tuesday. Such a one-time demand boost would amplify any subsequent softening of economic activity. The gauge of consumption activity monitored by the Bank of Japan hasn’t shown the big swings that it did in 2014, the BOJ said in the minutes of its July meeting released last week. Consumer spending is already enjoying an upswing, thanks in part to an extremely tight labor market, the central bank noted. The jobless rate stands at 2.2 percent; at the start of 2014, it was 3.7 percent.
Why Japan’s government wants to take a chance is puzzling, though. Households have been carrying the load as big manufacturers weather a hit from trade conflicts. Proceeding with something that even has the potential to chip away at that resilience is a mistake. Gross domestic product revisions two weeks ago underscore the danger: GDP rose an annualized 1.3 percent in the second quarter, down from a prior reading of 1.8 percent. Business investment missed estimates by a wide margin, with private consumption shoring things up.
Mandarins in the Ministry of Finance have long desired to buttress the country’s tax base as the population ages. While many Japanese are working later in life, owing to labor shortages, at some point they will retire. The tax base needs to be broadened, so the argument runs, to safeguard the kind of infrastructure and services Japanese have come to expect.
The trouble is that this tax increase won’t do much to help. Many of those services are increasingly unsustainable outside major cities and are already eroding in provincial Japan.
The irony is that despite decades of budget deficits, Japan’s fiscal policy isn’t especially loose. The shortfall is now about 2.5 percent of GDP, the smallest since 2007. It approached 10 percent in the aftermath of the Great Recession and was a bit more than that during Japan’s banking crisis of the late 1990s.
Abe’s team has pledged a return to balance by 2025. That would be a mistake, Olivier Blanchard and Takeshi Tashiro argued in a paper from the Peterson Institute for International Economics published in May. Deficits may be needed for a prolonged period to bolster demand, they wrote. The best use of that money would be measures to promote fertility. There’s a lot to be said for public investment when Tokyo is paid to borrow; the yield on the 10-year Japanese government bond is minus 0.25 percent.
There’s also the nightmarish process of making the tax hike work in practice. The devil lies in the detail of those exemptions aimed at making the higher levy more palatable. Food will remain taxed at the old rate of 8 percent, but that leads to some excruciating definitions of what is and isn’t food. For example, a takeout hamburger stays at 8 percent. Eaten on the premises is seen as dining out, however, so the new 10 percent rate applies. Bento boxes enjoyed in a meeting hold at 8 percent. A bento consumed at a convenience store climbs to 10 percent, according to a helpful guide from Nippon.com.
A year ago, when Abe finally committed to the increase, he said that only a Lehman-style shock would forestall the hike a third time. Japan and the world were spared such a catastrophe. Still, bankruptcies of Wall Street titans don’t happen very often, so the analogy isn’t particularly helpful.
Economic downdrafts are more common. We’re in one now, whether or not it morphs into a global recession. Surely, the world’s third-biggest economy could do without even a whiff of trouble.Daniel Moss
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. -- Ed.(Bloomberg)