Delay Urged in Japanese Sales Tax Increase

CHIYODA-KU, Japan - April 19, 2016 - PRLog -- Japan is in danger of falling into another financial crisis if it continues to pursue its current approach to taxation, according to one of the foremost experts on Japanese economic affairs. Stuart Poulson, who acts as Head of Corporate Trading for the highly respected Nikko-Desjardins Asset Management firm, said that it was too soon to go ahead with the planned increase in sales tax, currently slated to come into force next year.

The tax on consumer goods, which stood at 5% as recently as 2014, now has a general rate of 8%, he said, and even this had caused considerable slowdown, with the year to February seeing consumer prices rising at a mere 0.3%. Japanese consumers are renowned as some of the most risk-averse in the world, and the original plan to increase the tax further to 10% as early as fall 2015 could have led to the country slipping into recession once again.

While the proposed second stage increase to 10% was not in itself a bad idea, said Mr Poulson, the timing was less than optimal. He pointed out that Japan's economy was still showing considerable signs of weakness, and that consumer confidence was still shaky in the wake of the country's last recessionary period, from which it emerged only at the end of 2015, after preliminary figures indicating another recession were revised upward.

According to research carried out by Nikko-Desjardins analysts, even the possibility of another recession could lead many in Japan to keep their money in their pockets, with potentially severe consequences, especially for the retail and consumer services sectors. The Japanese economy is the third largest in the world, meaning that any significant slowdown there is likely to have serious repercussions across the globe.

A number of prominent Japanese commentators and economists have also called on the government to delay the implementation of the new rate of sales tax, citing concerns over possible market instability and the effect on Japanese manufacturers, especially those which are highly dependent on the consumer market. Even the prime minister's own advisers have voiced their worries in unusually emphatic language.

Mr Poulson suggested that the ideal approach would not be to withdraw the tax increase entirely, as this would likely lead to businesses becoming less likely to believe government assurances on a wide range of economic issues. By world standards, the Japanese government enjoys high levels of trust from the business community, thanks to its generally cautious approach and the nature of the country's society.

Instead, he proposed that the introduction of the new tax rate should be put on hold for an indefinite period, and that it should be brought into force only when the economy could be shown to be in good and stable health. If this was not done, he warned, it might have similar effects to a doctor introducing new medication to a patient before the efficacy of that patient's initial treatment had been assessed.

Japan's unique geographical factors also need to be taken into account, say Nikko-Desjardins analysts. The devastating earthquake and subsequent tsunami that hit the east coast of Honshu Island in 2011 caused major disruption to Japan's economy, with the after-effects of the event still being felt today. Japan's Pacific Rim location makes it highly prone to suffering further earthquakes in the future.

Stuart Poulson expressed praise for Japanese Prime Minister Shinzo Abe's "Three Arrows" policy, which puts strong emphasis on structural reform to accompany monetary expansion and fiscal stimulus. However, he expressed doubt as to whether all elements of the policy were being put into practice in a sufficiently strong way, citing the sales tax proposals as an example of a policy good in principle but in need of fine tuning.

Political factors complicate the situation, limiting the government's ability to make quick decisions. Increasing the sales tax rate to 10% in April 2017 has been passed by the country's parliament, meaning that Japan faced a snap election if attempts were made to postpone the move's introduction. This could impose yet further uncertainty on an already jittery market, warned Mr Poulson.

The Bank of Japan is injecting trillions of yen into the economy, as well as receiving a certain amount of revenue thanks to negative interest rates. Mr Poulson expressed concern at the impact of this policy continuing in the longer term, given that they also tended to unsettle markets. He referenced the warnings given by Nobel-winning economist Paul Krugman, saying that the market was too sensitive for a sales tax increase now to be appropriate.

Tomas Taylor
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Tags:Japan, Financial Crisis, Japan Tax
Location:Chiyoda-ku - Tokyo - Japan
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