Strong enough for a sales tax hike?

The Cabinet Office on Aug. 12 announced that gross domestic product increased 0.6 percent, or an annualized 2.6 percent, in real terms for the April-June period from the previous quarter. The growth appears to be steadfast and some experts say the economic recovery is strong enough to enable the government to go ahead with a plan to raise the consumption tax rate from the current 5 percent to 8 percent in April 2014.

The government should carefully study related economic figures to decide whether the Japanese economy is strong enough to bear the brunt of the consumption tax hike. Another consumption tax increase — to 10 percent — is planned from October 2015.

GDP has now grown for three consecutive quarters. The Abe administration has the goal of attaining an average of 2 percent economic growth for 10 years. GDP growth has topped the 2 percent target for two consecutive quarters.

But the annualized 2.6 percent growth in the April-June period is lower than the annualized 3.8 percent growth achieved in the January-March period and lower than the 3 to 3.5 percent growth expected by many economists.

Exports increased 3 percent in the April-June period, assisted by a cheaper yen due to the Bank of Japan’s massive monetary easing. Exports to the United States were in good shape and those to Europe increased for the first time in two months. But exports to China and other Asian countries decreased. Attention must be paid to a possible serious setback of the Chinese economy and generally unstable economic conditions of emerging markets.

While exports of cars, steel and chemical products were strong, exports of high tech electronics such as semiconductors and related components were not. It is imperative to improve the competitiveness of Japan’s electronics industry.

Consumer spending, which accounts for some 60 percent of the nation’s GDP, rose 0.8 percent from the previous quarter. Purchases of air conditioners, clothes, high-priced goods and financial services increased, and people dined out more. But the consumer attitude index dropped in June for the first time in six months. Although workers at some major firms received better summer bonuses, workers as a whole are not enjoying increased wages and some are still reluctant to loosen their purse strings.

According to the Cabinet Office’s statistics on orders for machinery, released Aug. 13, private-sector demand, excluding that for the shipbuilding and electricity sectors, increased 6.8 percent in the April-June period from the previous quarter and 6.4 percent from a year earlier.

But the office’s Aug. 12 announcement showed that housing investment dipped 0.2 percent, and capital investment 0.1 percent, from the previous quarter, with the latter suffering its sixth straight quarterly decline. This suggests that businesses are not confident about the prospect for increasing demand.

If the consumption tax rate is raised at a time when workers’ wages are stagnant, consumption will contract, causing a negative impact on the whole economy. The government cannot be too careful in deciding whether to increase the tax rate as planned.

  • YoDude12

    Tax cuts for corporations. Sales tax increases that effect the lowest and middle classes the most. You know who your true friends are if you get off the Sanma and Shishedo path to happiness.

  • YoDude12

    1+1=3?