Alison Evans, Senior Analyst, IHS Economics & Country Risk
Harumi Taguchi, Principal Economist, IHS Economics & Country Risk
Key Points:
- 1 June Prime Minister Shinzo Abe announced that a second increase in Japan’s consumption tax from 8 to 10% will be postponed again, and that 2 June a Cabinet decision should confirm the Upper House election for 10 July.
- This hike has been postponed from October 2015 to April 2017, and now to October 2019, because the first increase in April 2014, from 5% to 8%, caused a brief recession: annual GDP growth fell from 1.4% in 2013 to -0.1% in 2014.
- The aim of 3% growth was intended to make Japan’s economy resilient enough to weather the negative impact of consumption-tax increases. However, Japan’s real GDP growth has been below 2% since 2011 and in May IHS Economics reduced its 2016 and 2017 forecasts for real GDP growth to 0.5% and 0.4% respectively, because the downside of a stronger yen affecting exports and consumer spending will offset any upside from government spending.
IHS Economics & Country Risk views:
The announcement is likely to improve the LDP (Liberal Democratic Party)’s prospects for the Upper House election, now scheduled for 10 July.
However, there is a possibility that the postponement will deteriorate the near-term outlook for fiscal balance. In keeping with the second stage of “Abenomics”, Abe intends to increase spending on childcare and nursing as planned in the 2017 fiscal year budget, which was supposed to be funded by the tax increase. Similarly, in the medium term, increasing revenue is essential for the government to pay off its debt, which was approximately 230% of GDP in 2015 according to IHS Economics figures. Government financing issues are only likely to worsen in the medium-to-long term because Japan’s population is already the oldest in the world and still rapidly ageing.