Business

Japanese businesses say impact of October's sales tax hike less painful than 2014

Reuters

More than two-thirds of Japanese companies are feeling less pain from a sales tax increase last month than from the previous increase five years ago, which precipitated a recession, a Reuters poll has found.

The results of the survey support the view of the government and Bank of Japan that the economy looks likely to avoid a drop in private consumption, thanks to steps taken to offset how the tax increase will affect the public.

Still, the overwhelming majority of Japanese companies remain cautious about boosting spending, with many planning to keep wages and hiring flat or even reduce them.

The survey offers the first corporate gauge of the impact of increasing the national sales tax to 10 percent from 8 percent, a step Prime Minister Shinzo Abe said was critical to curbing the country’s enormous public debt. He delayed it twice for fear it would squeeze consumer spending.

More than 70 percent of companies surveyed said both the rush to buy ahead of the Oct. 1 increase and the subsequent pullback have been milder than when the sales tax increased from 5 percent to 8 percent in April 2014. That tax hike dealt a blow to private consumption, which makes up about 60 percent of the economy.

When the economy stumbled after the 2014 increase, BOJ Gov. Haruhiko Kuroda said he had underestimated the shopping spree and pullback, and subsequent declines in real income.

Although the impact this time seems smaller, that may mask underlying weakness in the world’s third-longest economy, analysts say.

“Consumers could not go on a last-minute spending spree to beat the tax hike due to sluggish wage growth,” said Kyohei Morita, chief economist Japan at Credit Agricole Securities.

Confounding expectations about lower last-minute demand, government data released Friday showed Japan’s household spending rose at the fastest pace on record in September as consumers rushed to buy goods before the rate rose.

Although that could raise fears of subsequent pull-back in demand, separate data showed real wages rose in September for the first time in nine months, offering temporary relief to policymakers worried about tepid pay raise and tame consumption.

The survey offered scant hope on wages, a long-standing weakness for Abenomics, with three-quarters of companies saying they have no plans to increase wages or add workers.

On hiring, 63 percent said they plan to maintain current levels, while 16 percent plan to trim their workforce; 62 percent plan to hold the line on base pay while 4 percent aim to reduce their wage bill.

“As the economy is in a downtrend, Japanese firms will likely refrain from hiring,” a manager at a wholesaler wrote. “Wages won’t rise unless the economy recovers.”

Some of the minority of firms planning wage increases cited Japan’s labor crunch, which has prompted companies to scramble for workers as the population ages and shrinks — even though higher wages may hurt profits.

The survey, conducted between Oct. 24 and Nov. 1 for Reuters by Nikkei Research, canvassed 503 big and midsize nonfinancial companies. Roughly half responded to the questions on the tax hike, hiring and pay, on condition of anonymity.

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