Banks see economy withstanding sales tax increase

Bloomberg

The economy will probably withstand the consumption tax increase that took effect Tuesday as Prime Minister Shinzo Abe prepares stimulus measures and companies raise wages, the new head of the bank lobby said.

Abe remains on track to achieve his goal of ending deflation after embarking on unprecedented monetary easing and fiscal spending a year ago, Nobuyuki Hirano, who replaced Takeshi Kunibe on Tuesday as chairman of the Japanese Bankers Association, said in an interview. Hirano is president of Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank.

The increase of 3 percentage points to 8 percent may trigger the deepest one-quarter economic contraction since the March 2011 quake, economists surveyed by Bloomberg estimate. The administration plans to front-load budget spending to help weather the blow from the higher levy, and the Bank of Japan has signaled that it’s ready to boost easing if needed.

“The risk to Abenomics is how it can overcome a dip in the economy that’s expected to result from the sales tax hike,” Hirano, 62, said in the interview last month, referring to the prime minister’s policies. “But there’s a good chance that the economy will withstand the increase.”

Gross domestic product will shrink 3.5 percent in the three months ending in June, according to the median estimate of economists, ending a projected six straight quarters of growth. The government approved a ¥5.5 trillion extra budget in December to offset the impact of the higher sales tax.

Hirano said the contraction will be temporary and won’t have a large impact on banks’ earnings, as loan demand continues to pick up.

“Credit demand is rising from various sectors and I expect the trend of lending growth will be sustained through this fiscal year,” Hirano said.

Loans at major banks climbed for a 15th month in February, BOJ data show.

Sentiment among large manufacturers rose to the highest level since 2007, the BOJ’s quarterly “tankan” report showed Tuesday. The tankan index climbed to 17 in March from 16 in December.