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The problem of falling prices should be handled by gradually increasing the consumption tax to 15 percent over a decade from the current 5 percent, according to a proposal made in a report by Fuji Research Institute.

The deflationary trend has also been noticed by ordinary citizens, according to advertising agency Dentsu Inc. A survey it conducted in February shows that 33.4 percent of people polled in the Tokyo metropolitan area have personally observed falling prices.

The reports follow a government announcement last month that the economy is in the grip of deflation due to continued consumer and wholesale price falls. It was the first time for the government to acknowledge a state of deflation since the end of World War II.

Dentsu said its survey shows the proportion of people tightening their purse strings from a year before rose 4.5 percentage points from the previous survey in December to 37.1 percent.

The proportion of those who reported personally observing falling prices was higher among men, at nearly 40 percent, than among women, at about 25 percent, the agency said.

The difference may reflect the types of goods and services men and women buy, it said.

“Salaried male workers have more chance to get in touch with such discounts as half-priced hamburgers and ‘gyudon’ beef-topped bowls of rice. In contrast, housewives, given the winter surge in vegetable prices, might be less aware of price drops in other foods and daily goods,” the agency said.

By category, the largest proportion of respondents — 39.9 percent — said they noticed discounts in fashion and apparel, showing the prevalence of price falls in the sector spurred by Fast Retailing Co.’s Uniqlo brand of casual clothes.

The Fuji Bank-affiliated think tank pointed out in its report that moderate inflation is needed to shore up the economy, which it describes as on the verge of falling into a deflationary spiral where falling prices and a recession feed off each other.

Making estimates based on the effects of the rise in the consumption tax to 5 percent from 3 percent in 1997, the institute said a 1 percentage point tax rise per annum will increase consumer expenditures by 1 trillion yen.

It recommends, however, that the tax be hiked gradually, by 0.25 percentage point every three months, to avoid spurring the rush of consumption seen just before the previous hike in April 1997 and the subsequent slump.

The institute also said income, corporate and other taxes should be reduced when the consumption tax is hiked so the overall tax burden remains unchanged. It also suggests that food and other necessities be exempt from the consumption tax.

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