|

Japan’s economy strong enough to weather tax hike storm

by Minoru Matsutani

Staff Writer

Last year Japan’s economy finally refound some backbone, with strong growth, better company earnings, falling unemployment and the key stock index soaring by a half to a six-year high, thanks mainly to Prime Minister Shinzo Abe’s economic measures, the so-called “Abenomics.”

The positive effect of Abenomics will continue to benefit Japan this year, company executives and economists said. Japan will see wage hikes, surging stock prices, a comfortable exchange rate, and an increase in capital spending and individual consumption, they said.

Abe attended an annual meeting of the World Economic Forum, dubbed Davos after the Swiss resort where it is held, which started Wednesday. He presented the achievements of Abenomics to an audience of the world’s political and business leaders.

“I believe Japan will enjoy economic growth this year,” Japan Business Federation, or Keidanren, Chairman Hiromasa Yonekura said at a news conference earlier this month. “Economic measures taken by the government will have a big impact, which will overshadow any negative impact of the consumption tax hike.”

Yonekura’s scenario is mirrored by many other business executives and economists: Japan will have brisk growth in the January to March quarter because people will likely make big-item purchases before the consumption tax is raised from 5 percent to 8 percent April 1. A ¥5.5 trillion supplementary budget during this fiscal year, ending March, will also help. The second quarter will see contraction due to the tax hike, but the economy is likely to recover swiftly in the second half thanks to Abenomics’ growth strategies, other measures and overall positive momentum among consumers.

“External factors also look good,” he said. The U.S. economy looks good, confidence in the European economy is being restored and developing countries continue to grow, he added.

Still, some business leaders and economists do not share Yonekura’s optimism. A survey by the Nihon Keizai Shimbun business daily, published Jan. 3, showed the estimates of this year’s growth rate range from 0.2 percent to 1.8 percent among 20 company presidents, with the average of 1.0 percent.

Nippon Life Insurance Co. President Yoshinobu Tsutsui, who gave the 0.2 percent estimate in the survey, said he expects low growth as the weak yen raises costs of raw materials, for which Japan relies heavily on imports. Orix Corp. Chairman and CEO Yoshihiko Miyauchi told The Japan Times that he is unsure of the Chinese economy and it may be a risk factor this year.

Nonetheless, overall sentiment is that the prospects for the Japanese economy are bright. Companies have begun raising salaries.

Some companies last year heeded Abe’s continuous pleas for them to give workers more. The move will this year spread to the vast majority of Japanese corporations as business leaders realize it is time for wages to rise.

“We have asked member companies to raise wages to realize a ‘virtuous’ cycle in the economy,” said Yonekura, the chief of Japan’s largest business lobby. “As a corporate manager, raising wages is always in my mind in order to reward workers’ efforts.”

Companies had been reluctant to hike wages even with last year’s robust economy because of doubts that the growth would be sustainable. The current momentum suggests that the economy is strong enough to offset any contraction of demand due to the April consumption tax hike, and thus wage hikes will create the virtuous cycle that increases purchasing power, which in turn improves company earnings.

Japanet Takata Co. President Akira Takata said his TV shopping company raised employees’ salaries by 3 percent this month as his company posted a record profit last year.

“The consumption tax hike is absolutely necessary for the country. Japan will overcome that and make this year a very good one. Consumer sentiment is that high,” he said.

Nomura Holdings Inc. Group CEO Koji Nagai also said much of the gloom has been lifted and people’s mind-set is very bright, with the weak yen and high stock prices encouraging consumers to purchase and companies to invest.

Fujitsu Research Institute Senior Research Fellow Hidetaka Yoneyama said the driving force of the Japanese economy from July will be exports and capital spending.

“The U.S. economy is brisk and thus exports will expand. Capital spending will be strong because Japanese companies have limited capital spending to the minimum for the past 10 years and company earnings are also strong,” Yoneyama said.

Of course, Japan’s economic growth will be smaller this year than last because of the consumption tax hike in April. The overall optimism comes from the notion that the growth rate is not as small as it would be even with the consumption tax hike.

According to an International Monetary Fund estimate in October, Japan’s growth rate was going to be 2.0 percent last year and it will drop to 1.2 percent this year. The growth rate in 2012 was also 2.0 percent and Japan’s economy shrank 0.6 percent in 2011, according to the IMF.

According to the government, which releases growth rates on a fiscal-year basis, the rate was 0.7 percent in fiscal 2012, which ended March 2013, and 0.3 percent in fiscal 2011. The Bank of Japan estimates growth rate to be 2.7 percent in the current fiscal year, 2013, and 1.5 percent in fiscal 2014.

Fujitsu Research Institute’s Yoneyama is relatively upbeat, estimating a 1.7 percent growth rate this year.

He said the 3-percentage-point hike of the consumption tax will contribute to an only 2 percent increase in the consumer price index, or CPI, as some business transactions and government service fees are not subject to the consumption tax.

Business leaders and economists apparently believe 1.0 percent growth, the average estimate of the 20 company presidents in the Nihon Keizai Shimbun survey and the seemingly widely accepted estimate among Japanese business leaders, is not bad for a year when the consumption tax is raised.

On the planned consumption tax hike from 8 percent to 10 percent in October 2015, the Japan Business Federation’s Yonekura said, “I would definitely like that to be realized. Economic growth and tax hikes are compatible.”

“Japan should realize economic growth and strengthen social welfare at the same time. The consumption tax hike will lead to the government’s financial health, which will raise Japan’s credibility around the world. People’s concerns over the future will be mitigated and consumption will be stimulated,” he said.

The brisk economy owes much to Abenomics’ so-called first and second arrows — radical monetary easing and fiscal spending — and expectations that the third arrow — growth strategies — will be successful.

Whether the growth strategies will really be a success will determine how much better the economy will be, business leaders and economists said.

The growth strategies are composed of many measures, including better utilization of women in the workforce, and deregulation in the medical and agricultural sectors.

“Doing them all is difficult. But things will improve if something that makes an impact is done. I think the TPP (Trans-Pacific Partnership) is one that will be realized relatively soon,” Orix’s Miyauchi said.

The TPP is a free-trade agreement among countries in the Pacific Rim region. Japan is in negotiations with 11 countries, including the U.S. China has not joined the negotiations.

The member countries had aimed to reach an agreement last year, but the negotiations are ongoing. Businesses welcome the TPP as it accelerates deregulation and has the potential to stimulate the economy while farmers and other people protected by regulations oppose it.

Among Abenomics’ growth strategies, Nomura’s Nagai has high expectations of a reduction of the corporate tax, which will encourage foreign companies to invest in Japan.

For Fujitsu Research Institute’s Yoneyama, establishing special economic zones, where various deregulation will be implemented, is one of the most important growth strategies.

“If such special zones become successful in bringing in foreign direct investment and other things, we can replicate the success nationwide. That will have a strong impact,” he said.

To push deregulation, the Diet passed several bills in November and December, including ones to set up special economic zones, and deregulate agriculture and the power generation industry.

Realizing growth strategies has a long way to go and Abe is expected to face opposition on deregulation.

“I would like him to implement strong leadership measures and take bold action,” the Japan Business Federation’s Yonekura said.

Download the PDF of this Davos Special 2014