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BOJ’s Kuroda says impact of next sales tax hike to be less than in 2014

by

Bloomberg

Bank of Japan Gov. Haruhiko Kuroda said Monday that the impact of a sales tax increase scheduled for April 2017 would be much less than that which resulted from the hike in 2014 — sending Japan into a recession.

“The effect of the sales tax hike will be about a bit more than half of what it was last time,” Kuroda said in response to questions from the audience following a speech in Tokyo.

“Front-loaded spending and a following drop in demand won’t be as big as the last time” because the overall increase is smaller than in 2014 and reduced tax rates will be applied on some items this time, he said.

Kuroda, a former director of the finance ministry’s tax division, gave the clearest indication yet of his desire to proceed with the sales tax increase in the nation with the world’s heaviest debt burden.

Lawmakers have repeatedly been asking Prime Minister Shinzo Abe whether he’ll proceed with the tax increase, with one of his advisers calling for it to be postponed, citing continuing weakness in the economy.

“Kuroda can’t help but indicate he wants the tax increase,” Hideo Kumano, an economist at Dai-ichi Life Research Institute, said Monday after Kuroda’s remarks. “We don’t know if his calculation is right. There is no momentum in consumer spending, unlike the last time, so the damage could be larger.”

Etsuro Honda, an economic adviser to Abe, last month said the increase by 2 percent to a 10 percent consumption levy should be postponed until April 2019. Abe has called for a panel of experts to discuss growing concerns about the global economy ahead of the Group of Seven summit he will host in May, setting up an opportunity to listen to economic experts and to conclude the tax increase wouldn’t be a good idea.

The prime minister has said — including in remarks last week to lawmakers — that Japan’s consumption suffered more, and for a longer period, than anticipated after the sales tax increase in April 2014. That was despite a fiscal package crafted to cushion the blow, following the experience of 1997, when an increase contributed to a recession. This time, lawmakers have been debating how to alleviate the blow by exempting some items — like food.

In his speech earlier Monday, Kuroda emphasized the positive aspects of his negative rate policy adopted in January, which took effect Feb. 16.

“The volatility recently observed in global financial markets certainly makes it more difficult to clearly see the effects of the negative interest rate policy,” he said. The policy “works in the direction of raising stock prices and lowering the value of the yen.”

The yen has strengthened about 5.5 percent this year, the most among major currencies, failing to return to its level at the start of the year even after the negative rate policy was adopted on Jan. 29. The nation’s Topix index dropped 11 percent this year through last week.

In his speech, Kuroda said the decline in yen interest rates is what the BOJ intended.

“The decline in yen interest rates and the fact that further monetary easing is possible — all else being equal — have a positive impact on asset prices,” he said.

He also said these effects “are being outweighed by the excessive risk aversion among investors around the globe. However, given that the fundamentals of Japan’s economy and its firms remain strong and that the negative interest rate policy will have powerful effects, financial markets will turn positive as investor confidence returns,” Kuroda said.

Kuroda also said that he couldn’t “deny” that quantitative easing with a negative interest rate “has an adverse effect on financial institutions’ earnings.”

  • Madiron

    The tax increase is actually two percentage points…not 2 percent.