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OECD secretary general Ángel Gurría shows a GDP growth chart for Japan (red) and the OECD (green) with Japanese Prime Minister Shinzo Abe during a courtesy call at the prime minister’s official residence in Tokyo on April 15. The Organisation for Economic Co-operation and Development is urging Japan to triple its sales tax, to 26 per cent, to achieve a large primary surplus. Photo: AP
Opinion
The View
by Dan Steinbock
The View
by Dan Steinbock

Japan faces an urgent economic problem, but a sales tax hike is not the solution

  • Tokyo plans to proceed with a sales tax increase in October, despite signs of economic weakness and signals of an end to monetary easing. But, instead of penalising the middle class, it should be solving Japan’s structural problems
Dan Steinbock
Dan Steinbock
Why you can trust SCMP
Japan has vowed to go ahead with a twice-delayed sales tax hike in October, unless there is a major economic shock. But recently, the cabinet office downgraded its headline assessment of Japan’s economy for the first time in three years. Manufacturing, housing and retail indicators reflected signs of weakness, while first-quarter economic figures, expected in May, could show a contraction – especially as the impact of US President Donald Trump’s trade war spreads in Asia.

The Japanese government’s efforts to rejuvenate the economy are unlikely to bear fruit any time soon.

In December 2012, when the Liberal Democratic Party returned to leadership, Prime Minister Shinzo Abe campaigned on providing massive fiscal stimulus, aggressive monetary easing and structural reform. The devaluation of the yen, critical to Japanese exporters, was the implicit denominator of the proposed changes.

In addition to high liquidity risk, Tokyo took a risk in timing. It sought to implement a stimulus package in 2013, and fiscal consolidation – in the form of a sales tax increase – was to follow. Obviously, unease increased in 2014. When Abe went ahead with the first sales tax hike, from 5 to 8 per cent, that spring, consumers were hit hard and the economy slumped. Instead of economic expansion, Japan was looking at its third lost decade.

However, international observers have been remarkably optimistic about Japan recently. Last November, the International Monetary Fund reported that Japan “has had an extended period of strong economic growth”.

As the growth rate, supported by huge monetary injections and growing debt, increased to 1.9 per cent in the fourth quarter of 2018 and inflation reached nearly 1.5 per cent, the Abe administration began to flirt with another tax hike. “The sales tax hike to 10 per cent is needed the most to secure stable financial resources to pay for social security for all generations,” said Finance Minister Taro Aso.

That is a pipe dream. Monetary injections and debt will just undermine Japan’s economic future. Six years ago, the new Bank of Japan governor, Haruhiko Kuroda, pledged to do whatever it takes to achieve the central bank’s 2 per cent inflation target. Under him, the BOJ boosted quantitative and qualitative easing with negative interest rates.
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In 2018, the BOJ’s bond and stock holdings topped 100 per cent of GDP. Now, the BOJ is adjusting the pace of bond purchases so that its holdings do not exceed 50 per cent of GDP, which some believe may signal an end to monetary easing.

In 2018, foreigners held a record 12 per cent share of outstanding debt, yet most debt is in Japanese hands and in yen. Falling rates in the US and elsewhere have made Japanese bonds attractive, as long as their yields do not fall too much because of BOJ policy.

Bank of Japan governor Haruhiko Kuroda arrives at the central bank's headquarters in Tokyo on April 25 for a policy meeting. The bank has pledged to keep interest rates extremely low, at least until the spring of 2020. Photo: Kyodo

But times may be changing. At the end of 2018, the BOJ’s ownership of Japanese government bonds fell for the first time in seven years, to 42.99 per cent. In the past five years, Japan’s government debt has climbed to more than 250 per cent of GDP. As long as interest rates remain ultra-low, the cost of servicing the debt is affordable. But nothing lasts forever.

Moreover, the 2 per cent inflation target has proved elusive and some argue that the BOJ’s purchases of exchange-traded funds are distorting the stock market.
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Japan faces a more urgent version of a problem facing advanced economies: how can it support high living standards with low or no growth?

In the past three decades, Japanese living standards, as measured in GDP per capita, have advanced from US$30,000 to nearly US$45,000. Yet, Japan’s trend growth has plunged from 5 per cent to less than 0.5 per cent – by more than 90 per cent.

Nevertheless, the Organisation for Economic Co-operation and Development is urging Japan to triple its sales tax, to 26 per cent, to achieve a large primary surplus. It also recommends spending cuts and curbs on health care services. In reality, such austerity could derail remaining support structures for growth, inflation and average prosperity in Japan.

Visitors gather to take photos of a two-car train on the Kominato railway line, framed by cherry blossoms which are reflected in the water of a rice paddy in Ichihara, Chiba Prefecture, east of Tokyo. Japan faces a more urgent version of a problem facing advanced economies: how can it support high living standards with low or no growth? Photo: EPA-EFE

Japan is the first advanced economy in secular stagnation, but others remain on the same path. Penalising Japan’s middle and working classes, while sustaining the kind of privatisation, liberalisation and deregulation that led to the income gap in the first place, is foolish.

To resolve structural problems, a more realistic programme is required to ensure fiscal sustainability, while raising productivity and reducing all unnecessary barriers to employment. But that’s only a start.
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Japan needs a national drive to reduce its gender pay gap (it ranks 110th in the Global Gender Gap Index 2018) and another to attract far more immigrants and naturalise them faster. In both cases, a change of magnitude is needed; nibbling reform will go nowhere. And, instead of rearmament, militarisation and conflict, Japan needs accelerated job creation, economic development and regional cooperation.

As the world’s third-largest economy and second-largest debt market, Tokyo’s future choices will have repercussions for the world – good and bad.

Dan Steinbock is the founder of Difference Group and has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Centre (Singapore). See: http://www.differencegroup.net/

This article appeared in the South China Morning Post print edition as: Taking the wrong tack
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