With the consumption tax rate raised from 5 percent to 8 percent on April 1, attention is focusing on whether the economic uptrend can survive the increased burden on households and the expected falloff in consumer spending. But it also needs to be closely watched whether the tax hike — the first of a planned two-stage increase that would eventually raise the tax rate to 10 percent from October 2015 — will be matched by other efforts to improve the nation's dire fiscal conditions and ensure the sustainability of its social security systems.
The first hike in the consumption tax in 17 years comes just as prices are rising under Prime Minister Shinzo Abe's quest to end the state of deflation that has plagued the economy. It is estimated that the tax hike plus the higher costs of imports and utility charges due to the weak yen will raise the financial burden on households by an average 4 percent. Although some leading firms with improved earnings have given employees their highest raises in years, the overall wage increase for the nation's workforce is unlikely to cover rising costs.
While consumer spending is estimated to have picked up in the last quarter as people rushed to buy ahead of the tax hike, the anticipated slump in consumption starting this month is widely forecast to put the nation's economic growth in negative territory in the April-June period.