Your SlideShare is downloading. ×
131009 japan consumption tax hike, harumi taguchi
131009 japan consumption tax hike, harumi taguchi
131009 japan consumption tax hike, harumi taguchi
131009 japan consumption tax hike, harumi taguchi
131009 japan consumption tax hike, harumi taguchi
131009 japan consumption tax hike, harumi taguchi
131009 japan consumption tax hike, harumi taguchi
131009 japan consumption tax hike, harumi taguchi
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

131009 japan consumption tax hike, harumi taguchi

207

Published on

Published in: Business, Technology
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
207
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. IHS Research Note: IHS Economics and Country Risk Principal Economist Harumi Taguchi’s analysis and commentary on Japan's consumption tax hike follows. Harumi may be reached in Tokyo on 81.3.4530.9730 or at Harumi.Taguchi@ihs.com for additional comment or if you have questions. -0- Japan: Consumption tax hike is a first step, but path toward fiscal reconstruction still unclear Prime Minister Shinzo Abe announced he will go ahead with plans to raise the consumption tax from 5% to 8% in April 2014. The government also decided on a JPY5 trillion (USD51 billion) stimulus package to counter the negative effects of tax effects on the economy. Given that corporate sentiment has been leaning toward increased fixed investment, the Japanese economy is likely to avoid recession caused by a slump for consumer spending. However, the next step in 2015 will be more of a challenge for the government.  Japan’s government announced plans to raise the consumption tax from 5% to 8% in April 2014 after the Tankan survey confirmed that current business conditions are improving.  The economic stimulus package includes cash benefits for low income households and tax breaks for homebuyers, as well as tax incentives to encourage corporations to increase fixed investment and wages.  Our main scenario is for public works and stronger private investment to partially offset the slowdown for consumer spending and prevent a recession. IHS global insight forecasts economic growth of 2.0% for Japan in 2014.  While the government aims to equalize the primary balance by 2020, the next step—raising the consumption tax from 8% to 10% together with cuts to the corporate taxes—will be more of a challenge for the government. Pursuing
  • 2. Abenomics’ goals of deregulation and structural reform will be the key to improving potential economic growth and fiscal balance. Prime Minister Shinzo Abe decided to take a step to raise the consumption tax to 8% in April 2014 after the September Tankan (released on October 1), confirming that the business sentiment was strengthening and that sales and profit outlooks were improving. The consumption tax hike―the most significant tax reform since April 1997―was planned by the previous government under the agreement between Democratic Party of Japan and the current ruling parties, the Liberal Democratic Party and New Komeito Party. The agreement included an opt-out clause allowing the tax hike to be postponed or cancelled if the economy was weak. Improving tax revenue is a critical issue, as the central government can cover only 46.5% of the expense by tax revenue and stamp duties, and the government’s debt is over 200% of Nominal GDP. Japan’s consumption tax rate is still relatively low compared with many developed countries. However, raising the consumption tax was controversial under the deflationary conditions and residual trauma from the last tax hike in 1997. The previous tax hike combined with Asia’s currency crisis and yen strengthening weaken domestic demand, fueling an economic recession in Japan.
  • 3. Source: Ministry of Finance Stimulus package to benefit corporations more than individuals Tax revenue from the consumption tax increase was to be used for social welfare spending. Social welfare spending currently accounts for 31.4% of the central government’s expense in Fiscal Year (FY) 2013 budget, and is likely to increase in tandem the higher weighting for older demographic groups. While Prime Minstar confirmed that revenue from the tax hike, estimating at JPY6 trillion, will only be used for social welfare, he plans to introduce a stimulus package to counter “shock” from the tax hike. The economic stimulus package includes cash benefits for low income households and tax breaks for home buyers, as well as tax incentives to encourage corporations to boost fixed investment and increase wages. A special corporate tax for earthquake reconstruction is going to end in April, a year ahead of the originally scheduled. The effective corporate tax rate for a big company in Tokyo would be lower to 35.6% from 38.0% by this tax cut. Although the stimulus package is planed more benefit for corporations than individuals, Abe believes the stimulus package is necessary to sustain the uptrend for the economy and that the plan will encourage corporations to increase wages. A detailed budget will be decided in December after a review of economic
  • 4. conditions. The government plans to use extra tax revenue from the economic recovery, funds leftover from the current year’s budget to avoid issuing new bonds if possible. A decision to raise the consumption tax, from 8% to 10% in October 2015, will depend on the economic conditions. Major stimulus programs Breakdown of the JPY5 trillion package Public works, such as infrastructure renovation (including spending for the 2020 summer Olympics) To be decided in December Acceleration of reconstruction from Great Eastern Japan Earthquake To be decided in December Ending a special corporate tax for earthquake reconstruction in April, ahead of the original schedule JPY 900 billion Cash benefit for low income households JPY 300 billion Tax breaks for new homebuyers JPY 110 billion Tax breaks for companies that increase fixed investment JPY 730 billion Tax breaks for companies that increase wages JPY 160 billion Source: Ministry of Finance The Japanese economy is likely to avoid a recession We see three main scenarios for the government’s plans to increase the consumption tax and pursue a stimulus package. 1) The first scenario anticipates moderate growth after Q2. Consumer spending grows at a slower pace in Q3 because only limited companies agree to raise base salaries, but many of them adjust overtime wages and bonuses in 2014. Corporations increase capital expenditures cautiously but steadily, taking the advantage of a tax break on the top of a recovery for exports and better profit outlooks. Public works increase, but upside is partially offset by higher costs for materials and a shortages of construction workers. Continuing economic growth lets the government implement the next tax hike and pursue another fiscal stimulus package, including broader benefits for low income households, or lower tax rate for necessities. The Bank of Japan holds the current level of monetary easing, barring increased downside risk for the economy or CPI outlooks.
  • 5. 2) The second is the upside scenario. Consumer spending dips after last-minute demand before the tax hike in the second quarter (Q2) 2014, then rebounds quickly on expectations for wage increases and improved employment, along with upside from the expansion of corporate facilities and public works. In this case, the economy recovers quickly and government revenue increases because of the economic improvement and the higher consumption tax. The better economic conditions make it easier for the government to implement the next tax hike, from 8% to 10% from October 2015. This will also be paired with another, smaller stimulus package to counter its impact. 3) The third is the downside scenario. Consumer spending continues to fall after the tax hike with no or very limited wage increases, and cash benefits fail to ease the impact of the tax increase on low income household. Under the situation that people over 65 years old now make up 25% of Japan’s population almost twice the 1997 level, pensioners curb spending not only because of the consumption tax hike, but also because of lower pensions and higher cost medical care for patients over 75 years old. Corporations do not respond to tax breaks and decline to increase fixed investment because of weak domestic demand. Growth for public works is limited because of labor shortages in construction, higher costs for materials and government’s inefficiency. This makes it difficult to proceed with the next tax hike, or it requires a larger stimulus package. This increases concerns about the government’s inability to control fiscal deficits, which in turn could trigger higher bond yields. The Bank of Japan may also need to pursue further aggressive monetary easing to avoid deflation. Our main scenario is the first scenario (a 70% probability), anticipating moderate growth from Q3. According to the September Tankan, large enterprises lowered fixed investment plans in FY2013, but large manufacturing enterprises raised their plans and medium-sized and small enterprises raised their outlooks for the second half of FY2013. Companies will also need to consider increased fixed investment with an eye on resolving problems with excess capacity. Public works and improved private investment are likely to help ease a slowdown of consumer spending and prevent a recession. IHS global insight forecasts economic growth of 2.0% for Japan in 2014.
  • 6. Could the government reduce the corporate taxes ? Although the stimulus package does not include cuts to the corporate tax, Prime Minister Abe mentioned plans to begin a serious discussion of the issue. Japan’s effective corporate tax rate is higher than neighboring Asian countries. A lower corporate tax rate has been a topic of discussion recently, and Abe intended to cut the effective corporate tax rate to 25-30% for improving competitiveness. However, Ministry of Finance estimates that every 1 percentage point will reduce tax revenue about JPY400 billon, and it is tough for the government to offset this. Japan’s tax revenue as a percentage of GDP declined to 8.8% in FY2012 from 13.4% in FY1989. This is partially because of lowering revenue from income and corporate taxes, reflecting wage reductions and a decline number of companies subject to taxation, but the declines is also due from tax cuts. Japan has lowered income tax rates for high income households, and cut the corporate tax rate from 43.3% in FY1988 to 25.5% (excluding a special corporate tax) in FY2012. It is obvious that those historical tax failed to increase domestic demand. GDP Outlook 2014 2015 CPI Outlook 2014 2015 The main scenario (a 70% probability) 2.0 1.3 2.8 2.1 The upside scenario (a 10% probability) 2.2 1.5 3.0 2.3 The downside scenario (a 20% probability) 1.7 1.0 2.6 1.9
  • 7. There is no simple link between cutting the corporate tax and increasing domestic investment. Only 27.2% of companies pay corporate taxes, and over 50% of revenue from the corporate tax is paid by 0.1% of the total. Many large companies paying the corporate tax have substantial retained earnings and cash flows. A high corporate tax rate used to be seen as one of the “six burden” for companies operating in Japan. The six burden included yen appreciation, environmental restrictions, electric power shortages, strict labor rules and other regulations, delays with the Trans-Pacific Partnership (TPP) and other free trade agreements (FTAs); and a need for lower corporate taxes and faster administrative approvals. Some of these problems have been resolved or addressed by the government, but the high corporate tax is not the most critical obstacle to increase domestic investment and Japan’s competitiveness. . Deregulation and structural reforms are the keys for improving potential growth and fiscal balance Japan is likely to avoid a critical economic downturn or recession in 2014 While the government aims to equalize the primary balance by 2020, the next step— raising the consumption tax from 8% to 10% and cutting the corporate tax— will be more of challenge for the government. Improving Japan’s attractiveness for
  • 8. investment will depend on deregulation and structural reforms, and there are the keys for improving potential growth and fiscal balance. -0- About IHS (www.ihs.com) IHS (NYSE: IHS) is the leading source of information, insight and analytics in critical areas that shape today's business landscape. Businesses and governments in more than 165 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high- impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and employs approximately 8,000 people in 31 countries around the world. IHS is a registered trademark of IHS Inc. All other company and product names may be trademarks of their respective owners. Copyright © 2013 IHS Inc. All rights reserved.

×