Abe sticks with plan to raise Japan's consumption tax despite weak tankan results

Prime Minister Shinzo Abe has twice avoided raising the consumption tax, citing domestic and international economic uncertainties.

But it appears this time he will follow through, despite mixed economic signals and the tax’s unpopularity among voters.

The Bank of Japan on Monday released the results of its April-June business sentiment survey better known as the tankan. The quarterly index shows that the confidence level among big manufacturers slipped from 12 in January-March to 7, sinking to its lowest level in about three years due to the slowdown of the Chinese economy and U.S.-China trade friction.

Despite the weak tankan results, it appears unlikely that Abe will postpone increasing the consumption tax from 8 percent to 10 percent on Oct. 1, according to analysts interviewed by The Japan Times.

“I think it is impossible to reverse course based on this report,” said Shunsuke Kobayashi, a senior economist at the Daiwa Institute of Research in Tokyo.

Although sentiment among big manufacturers dropped 5 points, sentiment among big nonmanufacturers went up 2 points to 23, exceeding market expectations.

Kobayashi said that since the United States and China called for a truce in their trade war, at least for the time being, and if the confidence outlook among big manufacturers for July-September doesn’t worsen further, it will be hard for the Abe government to justify postponing the tax increase.

It is too early, however, to definitively say whether the economy will withstand a tax hike, he cautioned.

Abe has said he will raise the consumption tax “unless something on par with the global financial crisis triggered by the collapse of Lehman Brothers takes place.”

With the Upper House election scheduled for July 21, Abe appears determined to go ahead with raising the tax. His administration last month approved an annual economic blueprint confirming the hike in order to cover sprawling social security costs.

Yasutoshi Nishimura, deputy chief Cabinet secretary, told reporters Monday morning there be no changes in the tax increase plan in response to the tankan.

To quell consumer apprehension, the government has unveiled an array of policies to encourage consumption. Some of the proposals include maintaining the current 8 percent tax on certain products, most notably groceries, and provide a 5 percent refund in purchases from small and medium-size businesses via cashless payments.

This will not be the first time Abe has raised the consumption tax. In April 2014, he oversaw a rise to 8 percent from 5 percent. The real GDP growth rate plummeted 7.1 percent over the next three months.

Tomohiro Ota, a senior economist at Goldman Sachs Japan, said there were a series of miscalculations and unintended consequences when Abe raised tax in 2014.

Ota said the 3 percentage point increase was “an unprecedented level.” Even though Prime Minister Noboru Takeshita set the original rate at 3 percent when the tax was introduced in 1989, the government also abolished so-called excise taxes, which offset the impact of the consumption tax hike, Ota said.

“Even though in reality the consumption tax was 3 percent, inflation accelerated by less than 1.5 percentage points in 1989,” he said. “In other words, the effective tax increase was about 1.5 percent and the other 1.5 percent may have been offset as a result of the elimination of excise taxes.”

Ota also mentioned that a weak yen might have played a role. April 2014, when Abe carried out the last consumption tax hike, was about a year into BOJ Gov. Haruhiko Kuroda’s radical quantitative and qualitative monetary easing, which depreciated the yen.

A weak yen means imports become more expensive, deterring consumers from purchasing. Along with high oil prices at that time, inflation was already running at around 1 percent before the tax hike, Ota said.

Regarding the impact from a tax hike this October, Ota remains relatively optimistic. Low inflation, moderate oil prices, lower taxes for food and cashless purchase incentives would promote consumption, he said.

The cashless payment refund, he said, will be “an interesting social experiment” to analyze consumer behavior.

“If you are going to buy something from small or medium-size businesses, it might be beneficial to hold off until after the tax hike (to take advantage of the cashless payment incentives),” he said. “I think the upcoming tax hike will test the rationality or price sensitivity of Japanese consumers.”