Japan finally decided to raise
sales tax from 5% to 8%, effective Apr2014, with some offsetting stimulus
measures, mainly in form of corporate tax reduction. With this, the government has
taken firm steps towards the familiar low growth levels.
Japanese consumers are already
suffering from supply side inflation. Closure of nuclear power plants and fall
in yen are leading to higher import price inflation, and thus higher domestic
inflation. Higher sales tax on top of that will hurt domestic consumption
strongly.
The government hopes to increase
Japanese household income to counter this problem. So they are asking the
industry whether they can do something about it. The government also has a
goodie bag of its own which includes tax exemptions for new house purchases and
for equity investments. The problem is that these measures are not sustainable.
In a land of shrinking population housing demand can be stimulated only so far.
When that population is ageing, it saves a lot and that also in safe options
like bank deposits and government bonds. Hoping to move them to equity markets
is rather ambitious.
What Japan really needs is
structural reforms. That is a very difficult and potentially unpopular task,
especially in a traditional society. That is also the topic of Mr. Abe’s third
arrow which seems to have gone missing.
