Sorting Out the Issues in Moving Towards an Increase in Consumption Tax in 2017(Apr 2016)

Downside risk continues for Japanese economy due to external factors

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  • Mitsumaru Kumagai
  • Satoshi Osanai
  • Keisuke Okamoto
  • Shunsuke Kobayashi
  • Shotaro Kugo
  • Hiroyuki Nagai

Summary

Downside risk grows for the Japanese economy due to external factors: Japan’s economy has remained in a lull, but we expect it to move toward a gradual recovery due to the following domestic factors: (1) Inventory adjustment is progressing, (2) The price of crude oil remains low, (3) Real wages are on the increase, and (4) The government’s supplementary budget has taken shape. However, caution is needed regarding downside risk in the overseas economy, especially that of China. (For further detail, see Japan’s Economic Outlook No. 188 (April 1, 2016), by Mitsumaru Kumagai.)


Risk factors facing Japan’s economy: Risk factors for the Japanese economy are: (1) The downward swing of China’s economy, (2) Tumult in the economies of emerging nations in response to the US exit strategy, (3) A worldwide decline in stock values due to geopolitical risk, and (4) The worsening of the Eurozone economy. Our outlook for China’s economy is optimistic in the short-term and pessimistic in the mid to long-term. Looking at China’s economic situation in a somewhat reductive way, the fact is that China’s government holds treasury funds totaling between 600 to 800 tril yen with which it is standing up to over 1,000 tril yen in excessive lending and over 400 tril yen in excess capital stock. China is expected to be able to avoid the bottom falling out of its economy for a little while, but in the mid to long-term, there is risk of a massive capital stock adjustment.


Sorting out the issues in moving towards an increase in consumption tax in 2017: In this report we take a look at what the issues are in moving towards another consumption tax hike in 2017. The sluggish recovery of consumption of durable goods after the increase in consumption tax in 2014 was influenced by the phenomenon of spiking demand in advance of the tax hike, which then fizzled out by the time the tax hike took place. This was thought to be due to past economic policies. Moreover, the weak outlook for income is thought to have had a major influence on consumption of services, especially in the area of non-essential personal services. Considering the situation, we calculated the effect of the 2017 consumption tax hike and compared the result with real GDP assuming no tax hike. This would put degree of influence at +0.3% in FY2016 and -0.6% in FY2017. Meanwhile, the effect of underlying support for personal consumption obtained by introducing a reduced tax rate is calculated to be approximately 1.1 tril yen in FY2017.

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