Prime minister Shinzo Abe has announced Japan’s biggest fiscal reform since 1997. The consumption tax, equivalent to Britain’s VAT, will be raised from 5% to 8% next April, and increased to 10% a year later. The tax is expected to increase revenues by ¥8trn.
The government will also introduce a ¥6trn stimulus package, which is likely to include tax rebates for companies boosting wages and measures to shore up capital spending by small and medium-sized firms.
The news was accompanied by a rise in business confidence among large companies to a six-year high. GDP is currently expanding at an annualised rate of 3.8%.
What the commentators said
Abe “hopes to have his cake and eat it too”, said Tobias Harris of Teneo Intelligence. The tax increase is to signal that Japan is serious about tackling its deficits and debt pile, which has now risen to 220% of GDP. Japan’s consumption tax remains far lower than the rich-country average of 18%.
At the same time, however, Abe will have remembered that, in 1997, a previous rise in the consumption tax caused a downturn – and the prime minister at the time lost his job.
So, to show that the government is still focused on “triggering sustainable growth”, Abe has introduced a stimulus package too.
Given what happened in 1997, the rise in the consumption tax is being seen as a gamble. But it looks as though “this time is different”, said Isabel Reynolds on Bloomberg.com.
Back then banks were practically bust following the collapse of the credit bubble and the Asian crisis was underway. Now bank loans are rising, firms are sitting on a record cash pile and firms are benefiting from a 21% slide in the yen against the dollar in the past year, thanks to the central bank’s money printing.
Annual consumer price inflation has turned positive and confidence has spread to the labour market.
Besides, said Neal Soss of Credit Suisse, Abe is also introducing structural reforms to give growth a sustainable boost, such as liberalising the labour market. All told, the impact of the tax hike “should be almost entirely offset”, he reckoned.
Given the encouraging economic outlook, the “move to a more sustainable fiscal path”, and undemanding valuations, said Invesco Perpetual’s Paul Chesson, “we remain bullish on the outlook for Japanese equities”.
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