On the eve of the Japan sales tax hike, a few brave souls ventured out into the supermarket to make last-minute purchases. When the clock hit 12:00 am last night (April 1), Japan’s sales tax jumped from 5% to 8%. This is the first rise in 17 years – so one can only imagine the public response.
A shopper says, “The sales tax is up to 8%, and that’s a bit of a shock. But if you think about it holistically, there isn’t much of a choice. If this increase helps Japan, I think it’s a good thing.”
Why the Second Quarter Will Slow Down…
Reuters’ Yonggi Kang says, “With the temporary pre-hike spending boost over, Japanese businesses are fretting over what’s going to happen in the months ahead.”
Though BOJ’s most recent survey shows that corporate sentiment improved over the three months to March, that’s likely to change. With this Japan tax hike, consumers will probably clutch their purses a little tighter, leaving companies worried for the next quarter. Fujitsu Research Institutes Senior Economist, Martin Schulz, explains the ins and outs.
Martin Schulz says, “3% more consumption tax, of course, has a big impact on households, also on corporations because corporations are still squeezed in term of their profits and the prices they can charge. For the households, it is a big number because their real incomes are still falling. Now with more inflation, real incomes are falling even more.”
It’s already expected for growth to slow down. A Reuters poll shows that economists gave a median forecast of 0.7% growth for the new fiscal year (from April 1). BOJ, on the other hand, forecasted 1.4%. According to experts, the solution is crystal clear: Prime Minister Shinzo Abe must fix the economy more aggressively.
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All Signs Point to
Martin Schulz says, “The most difficult time, not just for the government to sell this tax, but also for the overall economy and for the households is right now. Because prices have already been increasing from a weaker yen, from a very expansionary monetary policy, so overall prices have been going up, but wages have not been going up.
“Now the taxes are increasing as well, so households are getting squeezed and are very concerned. So the government needs to be really very careful this year to keep the economy going, that the overall negative impact of all these difficult policies will be balanced by additional growth, by additional reforms to come.”
Tick Tock, Tick Tock
If Abenomics is more than just short-term stimulus, the government is running out of time to prove that, says HSBC Holdings (HSBC). Now is the opportunity for Abe to deliver on the so-called “third arrow” reforms in order to handle deep-rooted issues (like labor). Abe is in hot water, and he needs to make a move fast. Another sales tax hike up to 10% is scheduled for October 2015.
Abe is known for bringing growth to Japan’s economy, but first he must sustain the momentum.