Japan: Strong Business Sentiment Fights Tax Bite

April 1st, 2014
in econ_news, syndication

JapanrisingsunEconintersect:  Industrial production in Japan fell in February  by 2.3% from January.  Economists had been expecting an increase of 0.3%.  Severe winter weather may have been a major factor.  The weather seems even more likely the culprit when the just-released Tankan business sentiment survey is considered.   The Bank of Japan survey for March found manufacturing sentiment at levels last seen in 2007.  Non-manufacturing sentiment reached a 22-year high.

Follow up:

The graphs below show the recent rapid rise in business sentiment.  They also show a very sharp drop expected in April.  The reason for the pessimistic projection is an increase in Japan's "consumption tax" which rises from 5% to 8% today (01 April).

Vertical line rhs of each graph defines current data. Right of those are projections.


Japan seems to be attempting something that could produce the ultimate frustration:  Pursue a expansive monetary policy and up until now an stimulative fiscal policy only to suddenly raise a broad tax by 60%.  GEI News, in an article titled "Japan:  Conflicted Policy", wrote last summer:

Japan introduced a consumption tax (CT), the equivalent of the European Value Added Tax (VAT), in 1989.  Initially the tax was  3%.  In 1998 the tax was increased by 67% to 5% where it remains currently.  The two tax dates coincide with the start of serious economic disruption in Japan:  (1) 1989 was the peak of the Japanese expansionary bubble and (2) 1998 was the start of Japan's most serious post-peak recession until The Great Recession of 2007-2009.

The CT changes may not have "caused" the two contractions, but it would be hard to argue that they did not exacerbate them.

Now the government is planning to introduce a negative consumption shock even greater than the first two over an 18-month time span, up from 5% to 8% CT in less than a year (April 2014) and another hike to 10% in October 2015.

The tax is effectively greater than 8% as the article last summer explained:

The CT has a far bigger impact on consumption costs than the nominal percentage because it is applied at every transfer step in the economy.  Looking at the goods portion of the economy, Econintersect proposes a hypothetical example.  Consider a five step economy:  (1) raw materials, (2) processing, (3) assembly, (4) distribution and (5) retail.  If each step has a 10% profit margin and a 10% added expense cost, a 10% CT would result in an added cost to the consumer of 8.4% above the cost of a 5% CT (and 17.9% above no CT).  The actual impact will be different than derived from these assumptions (and the model for services would be different) but it is clear that the impact of each 1% CT (or VAT) is larger than 1% on retail prices, even if the model used here  overestimates the burden of the tax.

This situation is entirely illogical unless Japan intends to turn this huge tax increase into some sort of income redistribution.  If it is simply to take money out of the economy it is an irrational move.  Japan's decades of deflation prove they need more money in the economy, not less.

John Lounsbury


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