Japan ups sales tax to 10 per cent amid signs of weakening economy

TOKYO (AP) — Japan raised its national sales tax to 10 per cent from eight per cent yesterday, risking short-term pain for the sake of the country’s future financial stability as it copes with a fast ageing and shrinking population.

Previous tax increases, a two-point increase to five per cent in 1997 and another to eight per cent in 2014, brought on recessions. Prime Minister Shinzo Abe twice delayed the move out of fears it might derail the tenuous expansion of the world’s third-largest economy. But he said this time it was unavoidable.

“We are pursuing social security reforms to ensure everyone is covered, that all generations from children to senior citizens can feel secure. This is going to be a first big step,” Abe told reporters.

The sales tax increase covers most goods and services from clothes, electronics to transportation and medical fees. But the government sought to soften its impact with tax breaks for home and car purchases, while launching a rewards programme for credit card and other “cashless” purchases at small- to medium-size restaurants and other retailers through next June.

The tax for groceries is unchanged for low-income households, and the government is providing free pre-school education to families and a payout to low-income pensioners.

Finance Minister Taro Aso noted yesterday that the limited amount of extra purchasing to beat the tax hike suggests the impact may not be as severe as in the past, when there was a rush of buying before taxes were raised.

A signboard says “Consumption tax hike, eight per cent to 10 per cent”, at a mass home electronics retailer in Tokyo. PHOTO: AP

After decades of fiscal deficits that have taken the debt to more than twice the size of the economy, Abe has promised a return to balance by 2025. That will require growth is sustained at a healthy pace.

The sales tax hike coincided with the release of data showing business sentiment among large manufacturers deteriorated in September to its worst level since 2013.

The result was better than expected, but the outlook is forecast to weaken further by December’s quarterly report of the Bank of Japan’s (BoJ) survey, called the Tankan.

“Particularly affected are producers of basic materials, reflecting recent commodity market movements, as well as producers of general-purpose and production machinery, who are exposed to risks posed by recent re-escalation of US-China trade frictions,” Oxford Economics said in a commentary.

Other data released this week have shown industrial output decreasing in August, while unemployment remained at a 26-year low of 2.2 per cent.

The economy expanded at an annual pace of 1.8 per cent in April-June, faster than anticipated. But slowing exports and rising prices for oil are expected to drag growth lower in coming months.

Analysts say the tax hike poses an extra deflationary risk at a time of growing uncertainty over tensions between the United States (US) and China — the country’s two biggest export markets — and over Japan’s own dispute with neighbouring South Korea.

It follows years of ultra-loose monetary policy aimed at convincing businesses to invest and frugal Japanese families to open their wallets.

“Considering the current economic conditions, the timing is bad,” said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.

The economy has slowed since late last year and demand generated by the construction boom for the Tokyo 2020 Olympics is fading, he said. The fear is that might undo years of efforts to escape a deflationary rut where falling prices due to slack demand depress investment, a main driver of growth.