Risky economic situation ahead

Now that the Abe administration has decided to raise the consumption tax rate from the current 5 percent to 8 percent from April 2014, it is all the more important for the government and businesses to make efforts to improve employment prospects for workers and to raise their wages.

The Bank of Japan hopes to achieve 2 percent inflation in two years. But an inflation target should not be the ultimate goal. The government and the central bank should realize that Japan’s long run of deflation has been caused by the downward wage trend.

At first glance, the Abe administration’s economic policy appears to be working. According to the BOJ’s tankan economic survey for September, the diffusion index (DI) for major manufacturers for September was plus-12, up eight points from the plus-4 for June. The DI is attained by subtracting the percentage of companies with poor business prospects from the percentage of those with good prospects. The DI figure is nearing the plus-19 registered in December 2007 — before the Lehman Brothers shock the next fall.

But the DI for small and medium-size manufacturers for September was still in a negative zone at minus 9, although that’s five points better than the minus-14 for June. Major manufacturers and nonmanufacturers revised downward their capital investments for fiscal 2013 from the June survey. Unemployment in August rose by 0.3 point from July to 4.1 percent, while workers’ monthly basic pay decreased for the 15th consecutive month in August.

The consumer price index, excluding perishable food, in August was 0.8 percent higher than in August 2012. It has risen for three straight months. But the government and the BOJ must be aware that the price rise is due to rises in the prices of imported materials caused by the BOJ’s cheap yen policy pursued in accordance with the Abe administration’s economic policy.

If prices go up while wages remain stagnant, people will experience financial difficulties and the government and the BOJ’s goal of ending deflation will be meaningless. The consumption tax rise very likely will burden people’s daily lives.

While the government decided to carry out a consumption tax increase, it decided to adopt ¥6 trillion worth of economic measures. The main pillars of these measures are increased spending for public works and tax reductions for businesses. It will be difficult for these measures to gain ordinary citizens’ support.

The government is also considering decreasing the effective rate of the corporate tax. Businesses may use these savings in taxes to increase their investments overseas or to accumulate internal reserves; they are not obliged to strive for greater employment or higher wages. At the very least, the government should drop its plan to end — one year earlier than originally planned — the tax surcharge added to the corporate tax to raise funds for the reconstruction of areas hit by the 3/11 disasters in March 2014.

Past experience shows that “trickle-down economics” does not work. The government should examine whether its economic policy orientation is correct and strictly watch businesses’ actions.

  • http://www.sheldonthinks.com/ andrew Sheldon

    How can you argue that rising tax by 3% to 8% is going to ‘break the economy’ when the government is concurrently debasing money by 25%. Expect more taxation; I’d say on property, but expect that in the 2nd term. I would however expect the govt to reduce the corporate tax rate.