Tokyo resident Reiko Oguma is splashing out in a last-minute buying spree as she and millions of shoppers brace for the first sales tax hike since the late 1990s.
Oguma, a housewife in her 40s, reckoned there was no time to lose so she shelled out about ¥200,000 for a new refrigerator and clothes ahead of the increase next Tuesday — as fears grow that the hike will take a bite out of consumer spending and derail the nascent economic recovery.
“I know that stuff is cheaper than it will be afterward so I’d rather buy it now,” said Oguma, among the thousands shopping in Tokyo’s bustling Shinjuku district, adding that she saved about ¥6,000.
Such modest savings and a new tax rate of 8 percent — up from 5 percent — might not register in places with much higher consumption taxes.
But not so in Japan, where the economy has long been locked in a deflationary spiral and consumers are used to paying pretty much the same prices year after year for their haircuts, televisions, beer and sushi.
Electric toothbrushes, family-size fridges and washing machines are selling fast at household and electronics chain Bic Camera, where sales in February were up almost 14 percent from a year earlier, despite unusually poor winter weather that might have otherwise kept shoppers at home.
“We’re seeing rush demand ahead of the tax increase,” a Bic spokesman said.
Some firms are absorbing the higher tax to keep prices steady, fearing a drop in customer traffic.
However, QB House, a ¥1,000 haircut chain, said prices will go up a full 8 percent to ¥1,080. The company reasoned that it kept its thrifty rates capped despite the last tax rise 17 years ago, when the levy rose to 5 percent from 3 percent.
“Under the current circumstances, it is hard to keep prices the same,” a company official said.
It’s a similar story for the Yoshinoya restaurant chain’s beef-on-rice bowls, which are set to cost ¥300, up from ¥280, owing to the tax rise and rising import costs, which have been pushed up by the weak yen.
Falling or static prices may sound great for household budgets, but wages have barely moved over the years and the cycle meant shoppers tended to hold off buying in the hope of getting goods cheaper down the road. That, in turn, hurt producers and slowed economic growth.
The tax rise is seen as crucial for bringing down the massive national debt.
But it has created a key challenge for a policy blitz unleashed by Prime Minister Shinzo Abe aimed at nudging the economy out of deflation.
A key worry is that the last tax rise, in 1997, deterred consumers and foreshadowed a cycle of falling prices — although other factors, including the Asian financial crisis, also weighed on the economy.
Consumer prices in 2013 logged their first annual rise in five years, while land prices are up in major cities for the first time since the global financial crisis in 2008.
Those inflationary signs — along with higher prices from the tax rise — are exacerbating fears about future spending, despite recent wage increases by major firms including Toyota and Panasonic.
Spending data “suggest consumers are getting thrifty, and expectations for salary increases were not enough to offset the trend,” said Credit Suisse analyst Hiromichi Shirakawa.
Among those tightening their belts is 19-year-old college student Yukako Muraishi.
“From April, I’ll be cutting back on spending,” she said after scooping up some expensive new clothes.
Still, not everyone thinks the late ’90s slowdown will repeat itself.
Last week, the Diet passed the biggest-ever budget to prop up growth, after the Bank of Japan last year unleashed an unprecedented monetary easing campaign to stir growth.
“Compared with 1997, we now have the central bank’s monetary easing and government policies designed to cushion the shock,” said Mitsubishi UFJ Morgan Stanley Securities senior economist Hiroshi Miyazaki.
“So, I don’t think the economy will slow down this time around.”