National

Analysts split on stimulus power to offset tax hike

Kyodo

Analysts are split on whether the forthcoming stimulus package can prevent the economy from suffering a severe downturn after the 5 percent consumption tax is raised to 8 percent next April.

Some of them say the package, involving ¥5.5 trillion in fresh funds from the central government, will fail to support households that would be directly hurt by the tax increase, possibly triggering a sharp deterioration in consumer confidence.

Others argue that the package, including a de facto corporate tax cut, will help improve corporate profits and motivate companies to raise wages, as urged by Prime Minister Shinzo Abe to prop up consumer spending and the broader economy. Wages so far have been flat if not actually slumping further.

The spending package was approved by Abe’s Cabinet on Dec. 5 as recent data have suggested that the “Abenomics” policy mix has been waning in effectiveness, sparking concern that the economy will slow at a faster pace than currently projected after the tax hike.

“Policy proposals in the new package are off the mark,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “A pillar of the package is large-scale public works projects, but the effect will be limited.”

Minami said the government should provide more generous support for households to encourage them to spend after the tax hike, as consumption accounts for more than 60 percent of gross domestic product.

“Given that Abe’s government has already implemented public works projects drastically since it was formed last December, additional benefits produced by them are likely to be too small to offset the negative impact of the tax hike,” Minami said.

“With consumption weakening, it will take quite a while before the economy returns to a recovery track,” he added.

Under the stimulus, ¥3.1 trillion will be allocated for public works projects to promote reconstruction work in areas hit hard by the March 2011 earthquake and tsunami, and new infrastructure investment ahead of the 2020 Tokyo Olympics.

But the government only earmarked ¥600 billion in cash benefits for people on low incomes, those with children and homebuyers.

Masashi Shimominami, credit strategist at Mizuho Securities Co., said however that the stimulus package could be “beneficial” as it may create a “virtuous circle” where improvement of corporate earnings leads to wage growth, resulting in more consumption as the cycle repeats.

The package entails the abolishment of the special corporate tax surcharge that was introduced to fund post-quake reconstruction work. It will end at the end of March, one year earlier than scheduled, for an effective corporate tax cut of ¥800 billion.

In addition, the Abe administration plans to carry out a ¥1 trillion tax cut to invigorate business investment and encourage companies to raise wages.

“Wage growth will be key to economic recovery, and the corporate tax cuts under the new stimulus package are expected to play an important role in achieving it,” Shimominami said. “As domestic demand is unlikely to shrink rapidly, the economy may start to pick up soon after the consumption tax hike.”

The administration estimates that the package will create at least 250,000 jobs and push up GDP by around 1 percentage point in real terms.

The economy grew in the July-September period for the fourth straight quarter on the back of Abenomics.

But the government-affiliated Japan Center for Economic Research said last month that GDP is forecast to plunge 4.8 percent in the April-June period in 2014.

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