Japan’s Economy: Monthly Outlook (September 2019)

◆Thorough analysis of consumption tax hike countermeasures and their effects: The consumption tax rate will be raised from the current 8% to 10% on October 1. In this report we examine the consumption tax increase and the content of countermeasures, while at the same time taking a comprehensive look at the consumption behavior of households as of this point in time, and examining the effects which the Japanese economy is likely to undergo after October.

◆First we examine the income effect in relation to the tax hike. A portion of household burden associated with the tax hike will be offset by the introduction of a reduced tax rate and social security enhancement measures such as free education. As a result, the net fiscal austerity effect is expected to be approximately Y2 tril less than the last time the consumption tax was raised (approximately Y8 tril). The negative income effect is expected to be resolved by various countermeasures, but the effect of these measures will gradually disappear through FY2020, giving way to the lingering effect of intermittent restraints on consumption.

◆The substitution effect associated with the tax hike shows a good possibility of being limited in comparison to the last time the consumption tax was raised. However, last-minute shipping has been generated in anticipation of last minute demand. Last-minute shipping in industries including motor vehicles, consumer electronics, pulp, paper & paper products, and chemicals has been especially conspicuous, as well as housing (measured in housing starts). It should be noted that it is highly likely the effect this has on increasing growth will disappear after the tax hike and move into a reactionary decline.

◆Estimating the effects of the rising price of crude oil: The situation in the Middle East has become increasingly uncertain after the drone attacks on two Saudi Arabian oil facilities which account for half of that country’s oil production capacity. There are now fears of tightening oil supplies worldwide. In response to this situation, the WTI price of crude oil has gone from the low 50s (USD/bbl.) to over 60 USD/bbl. at this time. In this report we estimate the effects of a 10 USD/bbl. rise in the WTI price of crude oil.

◆Using an industrial input-output table we estimated the effects on corporate business results. Our results show downward pressure of 0.8 trillion yen on operating surplus on an all industry basis. Looking at results by industry, we see downward pressure of 0.2 trillion yen on the manufacturing industry and 0.6 trillion yen on non-manufacturing. Next we used a macro model to estimate the effects on the Japanese economy overall. Our result shows downward pressure of 0.11% on real GDP and 0.48% on nominal GDP.