Japan consumers cautious on spending despite expected limited drag from sales tax increase
- Nation set to increase its sales tax from 8 per cent to 10 per cent on October 1
- The impact of the tax increase on consumer spending is important because private consumption accounts for 60 per cent of Japan’s gross domestic product
A Japanese sales tax increase that will take effect on Tuesday is expected to have only a limited negative impact on consumer spending compared with a larger increase five years ago, but data suggests households are tightening their purse-strings amid weak consumer confidence and concerns about the sustainability of government social security programmes.
Retailers have been cautious about offering aggressive discounts before the consumption tax is lifted from 8 per cent to 10 per cent on October 1, weary of stoking a boom-and-bust cycle that pushed the economy into a sharp contraction in the April-June quarter of 2014 after the same tax was raised to from 5 per cent 8 per cent on April 1 of that year.
The impact of the tax increase on consumer spending is important because private consumption accounts for 60 per cent of Japan’s total domestic output.
Many consumers are sitting on the sidelines ahead of the tax increase and retailers and restaurants are planning discount sales after its implementation to support spending.
The timing of this tax hike, in October, is better than the previous increases in April [in 2014 and 1997] in terms of avoiding rush purchases before the hike and a slump afterwards
To cushion the impact of the increase, food and non-alcoholic beverages consumed off-premises, as well as drugs and physical newspaper subscriptions will be subject to a lower 8 per cent tax. Smaller shops will be supported with a point-reward system for cashless purchases.
“The timing of this tax hike, in October, is better than the previous increases in April [in 2014 and 1997] in terms of avoiding rush purchases before the hike and a slump afterwards,” said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management. “Many companies try to boost sales at the end of every financial year in March and spending on house moving tends to increase in March before personnel changes in the new financial year.”
Despite some government measures to ease the pain of the tax rise, consumer sentiment has been depressed over the past 12 months and disposable incomes for many households will decrease, economists said.
Consumer confidence fell 0.7 points to 37.1 in August on a seasonally adjusted basis, posting the 11th straight month-on-month drop, according to the monthly Consumer Confidence Survey by the Cabinet Office.
Consumer attitudes were particularly low among those aged in their 60s and 70s, partly because bad weather pushed up food prices last year.
The Bank of Japan’s (BOJ) latest quarterly opinion survey showed a similar mood, with consumer sentiment tumbling for a fourth consecutive quarter. Many respondents based their assessments on personal and family income as well as how businesses in their community were doing.
Compounding the bad news was a report issued in June by the Financial Services Agency, a government watchdog, predicting the average elderly couple will need to have 20 million yen (US$186,000) on their own to fund a 30-year retirement because the public pension programme will not provide sufficient support.
Real average spending by households with two or more people posted an eighth straight year-on-year gain in July, but the pace of increase decelerated to 0.8 per cent from 2.7 per cent in June and 4.0 per cent in May.
Coinciding with the October 1 tax increase, the BOJ will release its closely watched quarterly Tankan survey on business sentiment and plans for September.
Many economists expect the survey’s diffusion index, which measures sentiment among major manufacturers, to fall to a six-and-a-half-year low. Government data showed Japanese exports slumped 8.2 per cent in August, posting the ninth straight year-on-year drop.
Takumori said the timing of the tax increase could raise questions about the success of Abenomics, Prime Minister Shinzo Abe’s signature economic package that combines large-scale monetary easing, focused fiscal spending and structural reforms.
“The tax hike when business and consumer sentiment is down will prompt people to say Abenomics is not working and make them even more cautious about spending,” Takumori said.
Inflation remains far below the central bank’s medium-term target of 2 per cent, with the core consumer price index, which excludes volatile fresh food prices, rising only 0.5 per cent in August from a year earlier. Labour market practices are rigid and public medical and pension reforms have been slow.
The sales tax increase to 10 per cent is estimated to boost tax revenue by 5.6 trillion yen (US$52 billion). But that figure will have limited impact in reducing the country’s interest payments on snowballing public debt.
From the viewpoint of fiscal reform, neither Abe’s ruling coalition nor main opposition parties has a clear vision on how to reduce payments on public debt totalling more than 1,100 trillion yen (US$10 trillion), or more than 200 per cent of the nation’s nominal gross domestic product (GDP) and double the average debt-to-GDP ratio among developed economies, said Japan Research Institute chief economist Kazuhiko Nishizawa.
Initially, the government planned to set aside about 4 trillion yen (US$37 billion) for paying down debt, but the Abe administration - seeking higher voter support for its growth strategies - has decided to use 1.7 trillion (US$16 billion) for subsidising free kindergarten and nursery school education, as well as paying part or all tuition fees for high school and university students from low-income families.
“The Abe government is stressing the positive effect of its plans for ‘free’ education, but nothing comes free. The tax payers will be paying for the new programme spending through the tax hike, which was supposed to be used to help reduce the debt-servicing cost,” Nishizawa noted.
“Japan won’t have enough tax revenue even after the consumption tax increase. We cannot afford to adopt the lower tax rate for some items,” he said. “Is making preschool education free really a top priority for this country?”
