Boosting Private Consumption in Japan
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The document discusses labor policies in Japan to boost employment after an earthquake and proposals to raise Japan's consumption tax rate. It includes presentations on supporting near-term employment, boosting overall employment among young, female and elderly workers, and arguments for raising the VAT tax rate sooner rather than later, in stepwise fashion, in a sustained and simple manner. The goal is to stimulate the economy and address Japan's aging population challenges and rising debt levels.
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Boosting Private Consumption in Japan
- 1. I. Boosting Private Consumption in Japan (Presented by Alessandro Scalisi ) II. Labor Policies to Boost Employment after the Earthquake Introduction & Supporting Near-Term Employment (Presented by Gouukon Miki ) Boosting Overall Employment & Conclusions (Presented by Christine Tsai) III. Raising the Consumption Tax in Japan (Presented by Nicholas Rutzen & 瀧波 栄一郎) Jan 12 ’12
- 2. BOOSTING PRIVATE CONSUMPTION IN JAPAN Presented by Alessandro Scalisi Japan: Selected Issues IMF Country Report No.10/212 (July 2010)
- 3. PRESENTATION PLAN 1. Introduction 2. Private Consumption in Japan: the Current Situation 3. The Drivers of Private Consumption: Causes of the Current Situation 4. Suggested Policies to Revive Consumption Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 4. 1. INTRODUCTION Private consumption is the largest component in GDP (≈ 60%) In Japan lower than G7 average Situation caused by stagnation of disposable household income Recommended policies to counter the problem: boost wage growth, diversify portfolio, improve access to credit and strenghten social security Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 5. 2. PRIVATE CONSUMPTION IN JAPAN: THE CURRENT SITUATION ≅56% of GDP, 4% lower than the G7 average, shrinking after 2002 Private consumption level tracks the household disposable income Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 6. 3. THE DRIVERS OF PRIVATE CONSUMPTION: CAUSES OF THE CURRENT SITUATION A. Stagnation of wages i. Productivity gap between the service and manifacturing sector ii. Increasing number of non-regular workers B. Decline of property income i. Households own low share of risky assets because of institutional, market-related and social reasons ii. Low debt and equity financing Because of small consumer credit and lack of reverse home mortgages Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 7. 4.1 SUGGESTED POLICIES TO REVIVE CONSUMPTION Boost wages growth i. Reforms aiming at increasing the service sector productivity ii. Increase labor flexibility Increase returns on savings i. Deregulations and decrease of cross- shareholding ii. Incentives for non-deposit financial assets holders Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 8. 4.2 SUGGESTED POLICIES TO REVIVE CONSUMPTION Improve access to credit and equity financing i. Greater sharing of credit information ii. Provide with reverse home mortgages Increase social security Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 9. JAPAN 2011 ARTICLE CONSULTATION 2011 SELECTED ISSUES LABOR POLICIES BOOST EMPLOYMENT AFTER TH EARTHQUAKE Presented by Miki Gouukon
- 10. A. INTRODUCTION The Great East Japan earthquake impact on 1.Labor markets in the region 2.Natio nwide Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 11. make 3.Reforms to raise its growth potential have to accelerat e Wｈｙ do we need reforms? Reasons： Weakening trend growth Finance fiscal reforms The demands of the old Growth chances 4.From B section, this note discusses how labor policies can support employment in the aftermath of the earthquake and boost growth over medium term. Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 12. 5.the government’s been supporting employment nationwide. the earthquake oil shocks in1970s the recent financial crisis B. SUPPORTING NEAR-TERM EMPLOYMENT 6.The employment adjustment subsidy 7.eased the eligibility criteria 5.The government’s provided temporary assistance to firms and workers in the affected region The Han-shin Awaji Earthquake Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 13. B. SUPPORTING NEAR-TERM EMPLOYMENT Labor market rigidities Lifetime employment contracts changing career is difficult Specific measures: Job search and relocation assistance, Incentives to hire and train low-wage workers given to employers, Job training by the government 8.Need to reintegrating the unemployed require measures that aid with job Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 14. B. SUPPORTING NEAR-TERM EMPLOYMENT 9. The unemployment insurance system People The governments Firms Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 15. B. SUPPORTING NEAR-TERM EMPLOYMENT REVIVING LABOR MARKETS IN THE TOHOKU REGION In terms of population and GDP, city centers(like TOKYO) account for nearly 2/3 outputs Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 16. • BOOSTING OVERALL EMPLOYMENT Presented by Christine Tsai • CONCLUSION
- 17. BOOSTING OVERALL EMPLOYMENT Young Female Elderly USA JAPA N ☆Japan is growing older faster than anywhere else in the world! Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 18. YOUNG EMPLOYMENT : Because most labor mkt decisions in JP made from college, university or trade school Problem 1. Lifetime employment guarantee 2. Many inequities exist in the current employment system Solution A New Labor Contract for New Generation! Young Female Elderly Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 19. YOUNG EMPLOYMENT : Young Female Elderly Solution Creating a more flexible and equal labor market overall to reform ! The number of available lifetime employment contracts Young workers in non-regular positions Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 20. Difference between Male and Female participation rates nearly 25% Female labor participation (FLP) rates are low Young Female Elderly FEMALE EMPLOYMENT :
- 21. FEMALE EMPLOYMENT Young Female Elderly One obstacle to higher FLP rates is the high drop-out rate of women from the labor force following child birth (Figure IV.2). Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 22. FEMALE EMPLOYMENT : Young Female Elderly One obstacle to higher FLP rates is the high drop-out rate of women from the labor force following child birth (Figure IV.2). Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 23. Providing support for working mothers may 1. Help reduce this disparity in female labor participation 2. Assist more female employees to become future managers FEMALE EMPLOYMENT : Young Female Elderly Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 24. ELDERLY EMPLOYMENT : Young Female Elderly Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 25. Across the OECD life expectancy has risen faster than the average retirement age ELDERLY EMPLOYMENT Young Female Elderly Solution Raising the Retirement Age will help • increase labor participation • reduce pressure on pension systems Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 26. CONCLUSION The earthquake has had an important impact on labor markets at the national level. The earthquake provides, however, also an opportunity to accelerate reforms to raise growth. Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎
- 27. WHY RAISING THE CONSUMPTION TAX (VAT) IN JAPAN By Eiichiro Takinami From the IMF Staff Discussion Note (June 16, 2011)
- 28. EXPENDITURES Gross Debt has tripled in past two decades (200% of GDP) Social security spending has risen 60% over the past 15 years. (rapid population aging)
- 29. WEAK TAX REVENUE ↑decline in tax revenue ↓tax revenue 17% of GDP is one of the lowest.
- 30. CAN WE SAVE SPENDING IN OTHER AREAS? Non-social Security spending is actually one of the lowest. Not much room to cut costs in other areas.
- 31. COMPARISON OF TAX REVENUES Lower personal income tax and consumption tax compared with other countries. Because of the aging society more spending > income
- 32. WHY VAT (CONSUMPTION) TAX? 1. Stable Source 2. Equally applied to everyone 3. doesn’t Distort house hold savings decision as much Ex: capital income tax Less damaging for economic growth compared with Personal Income and Corporate Tax
- 33. STABLE SOURCE IN AGING SOCIETY Shortage of labor Aging society= (spending > Income) Private consumption growth is 0.5% faster over the last 10 years than labor income
- 34. 5% VAT TAX IS ONE OF THE LOWEST European average is 20% Japan 1989 : 3% 1997: 5% 201X: 15%?
- 35. RAISING THE VAT TO SECURE FISCAL SUSTAINABILITY Need to have “down ward path” for Japan’s debt to GDP ratio. Gradual increase in VAT rate to 15% starting 2012
- 36. RAISING THE CONSUMPTION TAX IN JAPAN Presented by Nicholas Rutzen Japan: Selected Issues IMF Country Report No.10/212 (July 2010)
- 37. THE FOUR S’S Sooner rather than later Stepwise Sustained Simple The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎 Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai
- 38. SOONER RATHER THAN LATER • To take advantage of the fiscal recovery expected in 2012 and to strengthen credibility of the fiscal adjustment, the VAT tax increase should begin as soon as possible. The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎 Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai
- 39. STEPWISE • The VAT should be increased in steps over 5 years at 1 ¾ percentage points per year rather than over 2 years at 3 1/3 percentage points per year. The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎 Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai
- 40. SUSTAINED The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎 Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai • Rather than implementing a temporary increase in the VAT as some have suggested, the increase should be sustained as the problems in the Japanese economy will only get worse over time.
- 41. SIMPLE The Four S’s Nicholas Rutzen Why the VAT? 瀧波 栄一郎 Labor Policies Gouukon Miki Boosting Private Consumption Alessandro Scalisi Labor Policies Christine Tsai • A simple, uniform increase in the VAT is a much better solution that other proposed plans such as increases based on income level or increases on specific products, though it can be further improved with targeted transfers to low-income households being implemented.
Editor's Notes
- The Japanese government must create a gradual but sustained increase in Japan’s debt-to-GDP ratio of 10 percent over the next 10 years in order to get the economy on track. 5 percent is to come from decreasing spending and the other 5 percent must come from the VAT being increased. The VAT tax must begin being raised to 15 percent from its current 5 percent, starting as of this year, otherwise the effects will be greatly diminished. The graph displayed on the left shows the effect on debt with relation to GDP that an 11% VAT will have versus that of a 15% VAT. As you can see, it simply maintains the current level of debt rather than lowering it. The graph on the right shows the effects of waiting until 2014 to enact this plan of raising the VAT. As you can see, the debt level will rise much higher and in the medium to long term, the effect on debt will be decreased by roughly 10%.
- Increasing the VAT in steps rather than all at once will reduce the predicted negative short term impact on growth and stimulate consumption in the short term, contingent on the scheduled increases being made public knowledge. This is because people will increase consumption in order to avoid paying more in the future as the tax level increases. This effect has been seen in the past in Japan as well as other countries.The left graph clearly indicates that a rapid hike in the VAT would cause a massive decline in GDP in the short term. The graph on the right shows the same things but in terms of net public debt. The effect of a more rapid implementation of the tax would lower the amount of debt sooner and in the mid and long term it would lower by almost 10 percent. These effects seem to be useful and at first glance may seem worth while, however, the massive dip in growth resulting from a rapid increase could cause major economic problems not predicted in these charts, therefore, it is more prudent to follow the examples of other European countries who have raised their VAT, all of which did so gradually as can be seen in the chart to the upper right.
- You have all likely seen these graphs before so I won’t spend too much time on them. They show that as the population ages, more and more benefits that were held by the elderly in recent years will not carry over to future generations. The current state of the Japanese social security system is unsustainable without a drastic change. Making the VAT temporary will only serve to cause a more serious problem when the government begins relying on those funds and then they have them cut away. The main problems are structural and thus the structure of the economy must change. Another reason is that the benefits of this increase will continually increase the longer it is in effect, as you have seen in the graphs previously.
- The cost of implementing varying taxes rather than one uniform tax would be significant for the government. A problem that has been proposed with the VAT is that the lower income households will be put under significant strain because of it. This problem can be remedied by targeted transfers to the lower income households, this however, will reduce the income from the increase. I believe this should be implemented later because it is likely something that will take time to work out the amounts and to who, so it should be implemented after several years of research and study while the VAT should begin being raised this year as I showed earlier that time is an important factor.*explain graphs