The first stage of the sales tax hike next April will likely put a major drag on growth this year, although the nation will avert an outright recession, economists say.

“The consumption tax hike will be the biggest factor when forecasting Japan’s economy in 2014,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. “Assuming that wage increases will be minimal after the hike, consumer spending is highly likely to lose momentum,” he said.

Many economists predict that gross domestic product in real terms will rise less than 1 percent for fiscal 2014 starting in April.

Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute Inc., forecasts 0.9 percent growth. Ueno expects 0.3 percent.

The government, however, is taking a rosier view, targeting 1.4 percent growth for fiscal 2014. The target was approved by the Cabinet on Dec. 21.

Consumer spending, which accounts for more than 50 percent of GDP, will be the main concern after the sales tax rises to 8 percent from 5 percent. A second tax hike is to complete the doubling of the levy to 10 percent in 2015.

Economists expect the first hike to impact the economy in two ways.

First, it will raise the prices of goods, sapping consumers’ purchasing power.

Second, it will spur consumers to scramble to make purchases ahead of the hike, which means a spending slump is all but sure to follow.

“Given the consumption tax hike, it’s inevitable that the economy will slow down compared with 2013,” said Shinke. “But it won’t get any worse than a slowdown. I don’t expect a recession.”

The tax hike may weigh on spending, but Shinke thinks its impact on the economy will be mitigated by the stimulus package passed in December, which is worth ¥18.6 trillion. The package includes steps to promote reconstruction in areas damaged by the Great East Japan Earthquake and tsunami, infrastructure investment ahead of the 2020 Tokyo Olympics, local spending on public works projects, and capital investment by small companies.

Ueno also believes a recession will be averted, mainly because both exports and capital expenditures are expected to grow. He expects growth to accelerate in the January-March quarter, flatten out in April-June on a drop in real income levels, and pick up in the subsequent quarter.

He also expects growth in exports, another driver of the economy, to remain slow after the tax hike. Despite the weakening of the yen under “Abenomics,” exports have only grown slowly — after turning negative for the first time in three quarters in the July-September quarter.

The sluggish reaction in exports is generally blamed on slumps in the emerging economies and the eurozone, but Ueno also sees structural factors, including the shift overseas of Japanese manufacturers and the deteriorating competitiveness of Japanese products.

It seems most economists don’t see any significant risk factors for Japan. But when pressed to consider the worst case scenario, Shinke pointed abroad.

“This isn’t part of my main scenario, but the risk factors to watch for would lie outside Japan,” he said. “The tapering of quantitative easing in the United States is one. It could send an exaggerated signal and disturb the financial markets, and may lead to the yen’s appreciation.”

“I would also see if China’s economic bubble may again escalate, because it could lead the Chinese government to tighten its policy too far and significantly slow its economy,” Shinke said.

In any case, Japan’s economy isn’t yet on a firm recovery track driven by private-sector demand. That sort of genuine growth will have to wait until 2015 or even later, said Junya Morizane, an economist at Fukoku Mutual Life Insurance Co.

“There’ll be another consumption tax hike that year (in October, to 10 percent from 8 percent), and so 2015 might still be uncertain,” Morizane said.

One of Prime Minister Shinzo Abe’s declared goals is to stamp out deflation and bring about sustainable economic growth. Economists expect positive progress on deflation, but they take a dim view of the chances that the Bank of Japan’s inflation target of 2 percent in two years, set in January 2013, will ever be achieved.

“Prices will rise gradually as the supply-demand balance improves amid the economic recovery and inflation expectations rise,” Shinke said. “The 2 percent increase in price levels targeted by the Bank of Japan is difficult to achieve, but I would expect ‘deflation busting’ to be achieved by the end of fiscal 2014.”

Meanwhile, the outlook for the global economy, on balance, is mildly positive for Japan, with the emerging economies remaining sluggish but the advanced economies improving, according to Takeshi Makita, a senior economist at The Japan Research Institute Ltd.

In China, the leading emerging country and world’s second-biggest economy, there is little reason to expect an economic pickup, because exports will likely stay sluggish, investment will stay slow, and consumer spending cannot be expected to grow fast enough to offset those negatives, according to Makita, who said China is not a big importer of Japanese products in relative terms.

By contrast, the economic environments of Europe and the United States — two key markets for Japanese exports — are improving as the negative factors dissipate.

In Europe, there are moves afoot to relax the draconian fiscal tightening that has been stifling growth. In May, the European Commission allowed Spain, France, Poland, Slovenia, Portugal and the Netherlands to extend the deadline for cutting their budget deficits to targeted levels. Such moves mark a shift away from the bloc’s austerity-centered approach at a time when there is still no hope of Europe devising a fiscal stimulus. In the meantime, the risk of Europe slowing sharply has shrunk.

The world’s biggest economy has developed an even better outlook. The United States now has a self-sustaining recovery mechanism in place, with a positive cycle of employment growth boosting consumption, Makita said.

He believes the U.S. economy will continue to gain momentum, mainly thanks to such factors as housing prices, which had been a drag on U.S. growth. Housing has already bottomed out and is now driving the economy. In addition, U.S. households have significantly improved their balance sheets, thanks to the recovery in housing and stocks, leading to a steady increase in consumption.

“Overall, I expect the global economy will grow at a mild pace in 2014, with emerging economies sluggish and advanced economies doing relatively well,” Makita said.

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