Prime Minister Shinzo Abe announced plans to increase Japan's sales tax rate to 10% to boost tax revenues. However, this may negatively impact the economy as household spending has already been declining in recent years due to flat wages and more people living paycheck to paycheck. While some indicators show Japan's economy has recovered from its "Lost Decade" of stagnation, lingering problems remain like negative savings rates and low wages that suggest consumers may not be able to absorb a higher sales tax rate. Further tax hikes risk worsening the financial situation for average households more than it will benefit the economy.

1. Japan's
Planned
Sales Tax
Hike
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2. Few matters provoke a more visceral
reaction than the subject of taxes. For
the most part, the potential for drama
centers around three considerations:
who is taxed, how much is taxed, and
what items are being taxed.

3. Recently, Prime Minister Shinzo Abe
announced a series of sales tax hikes,
increasing rates to 10 percent. This
move certainly seems strange: after all,
much of the Japanese economy has
recovered from the famous “Lost
Decade” of the 1990s and 2000s,
characterized by economic stagnation
and rampant inflation (which gave rise
to the now-infamous term
“stagflation”).

4. Today, Japan has come very far.
Unemployment is so low that it can
barely be registered as a real number,
while other indicators of progress, such
as GDP per working-age adult, have
grown impressively. Further, the most
recent statistics estimate that some
85.2 percent of Japanese women are
working.

5. With the rise of the Liberal Democratic Party
(LDP), the organization to which Abe belongs,
economists began to reconsider the idea of
indirect taxation through consumption taxes.
In 2014, Abe postponed the tax hike twice; it
was only after he and his party won a landslide
election in 2017 that he agreed to finally push
through the sales tax hike. The only changes
were slightly lower rates for items like food,
beverages, and newspaper subscriptions, a
concession to coalition partner Komeito, a
centrist party comprised primarily of some 8
million middle-class and lower-income
Buddhists who often vote as a bloc.

6. All this makes for a unique situation: massive
corporate prosperity, low unemployment, low
wages, and an increased sales tax. Sadly, there
is further evidence that the tax hikes will
further hurt the average household. Thanks to
flat wages, household spending grew 2.4
percent in 2014, forcing many families to dip
into their savings. Just a year later, the
country’s savings rate, once the envy of the
developed world, fell to negative: 40 percent
of unmarried adults (and 30 percent of
families) lived paycheck-to-paycheck. This was
a 10 percent increase from a decade ago.

7. Though Abe claims that raising the sales tax to 10
percent will have less of an impact than the previous
hike (which raised rates from 5 to 8 percent), it’s
unclear whether this will actually be the case. Yet
analysts are already concerned about already-low
private consumption, especially as it could negatively
affect the construction boom running up to the 2020
Tokyo Olympics. From 2013-2016, private
consumption fell some 6 percentage points, a trend
that some experts blamed on the Abe administration
shifting the tax burden from businesses to households.
Unfortunately, this has only continued. In 2018,
household spending continued to shrink, driven largely
by thrifty Millennials who did not have the benefits of
lifetime employment like their fathers and
grandfathers before them, as well as pensioners on
tight budgets. Millennial households spent some 30
percent less, and close to 60 percent of high school
students viewed frugality, rather than generosity, as a
desirable trait.

8. Overall, it’s hard to say that hiking the sales
tax will prove beneficial for Japan’s economy
or society. Even if the nation is finally past its
Lost Decades, the fact remains that lingering
problems remain, especially where it concerns
the general financial health of the population A
negative savings rates and low wages, in
particular, don’t bode well for increased
consumption; and without buyers, there
cannot be economic growth. To throw in a
sales tax hike now, at all times, would only
worsen the picture--not for corporations
sitting pretty on stockpiles of cash, but for the
average consumer.

9. THANK YOU!
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