Thursday, August 8, 2013

Bank of Japan Governor Kuroda: Japanese Economy Will Grow with Sales Tax Hike

No wonder the Japan's stock market decided to tank yesterday.

Here's what BOJ Governor Haruhiko Kuroda said in the press conference after the BOJ meeting on August 8, 2013, as reported by Nikkei Shinbun (8/8/2013):


BOJ Governor says sales tax increase and growth out of deflation "will coexist"


During the press conference after the monetary policy meeting on August 8, Bank of Japan Governor Haruhiko Kuroda emphasized that he believed raising the sales tax rate and growing the economy out of deflation "will coexist". He cited the report "Outlook for economy and consumer prices", and commented on the Japanese economy after the sales tax hike, saying "It is highly likely that forward-looking loop will be maintained, and [the economy] will grow at a rate surpassing the potential growth rate."

I have no idea what "forward-looking", or positive, loop he is talking about when the sales tax is raised from the current 5% (it triggered the recession when it was introduced) to 8% come April 2014 (start of fiscal 2014). But I can guess from other remarks he made in the press conference. The positive loop for the economy is that people will hurry up and buy stuff before the new sales tax rate kicks in in January, boosting the economy during the run-up to the tax hike. Then after the hike, there will be tax breaks for corporations who will no doubt boost production and employment.

Sure. A pie in the sky.

What's more likely, in my humble opinion, is that consumers will stop spending, and corporations won't invest because there is no demand.

As far as I know, there is no offsetting reduction in personal income tax for the residents. On the contrary, personal income tax rates have actually been raised, supposedly to pay for the "recovery" and "reconstruction" of the disaster-affected Tohoku. The government under DPJ's Noda got away with introducing the carbon tax, further raising the cost of importing oil and gas.

Here's how he looked as he delivered the above, literally incredible remark, courtesy of Nikkei Shinbun:

Is he lying or is he lying?

In addition to normalcy bias, adoration of people with higher education and degrees from the nation's most prominent universities is Japan's hallmark. Most people will go, "Oh OK, if Mr. Kuroda says so. After all, he is a Tokyo University graduate, and he was a career bureaucrat at one of the most elite ministries (Ministry of Finance) who passed such a difficult entrance examination to become one!"

Nikkei's article has a short video clip of Kuroda answering questions from the reporters. One of the topics not mentioned in the article above is about the fiscal policy of the national government and its effect on monetary policy by BOJ.

Again, Kuroda said things as if no one but him knew what he was talking about.

He said,

"If the fiscal discipline becomes weak, it may affect the monetary policy..."

Fiscal discipline? Weak? Japan's fiscal discipline has been gone for at least two decades. How else is the national debt at 240% of GDP?

61% of Japan's GDP is from consumer spending, while 13% is from capital investment. Abe and Kuroda firmly believe by giving subsidies, incentives including free money printed by BOJ to large corporation to make capital investment the economy will expand. Does that make sense? No. Just ask China.

Japanese newspapers and NHK have been quoting the IMF report in the past few days in which IMF supposedly insists that Japan stick with the schedule of raising sales tax, possibly all the way up to 15%. Only Bloomberg Japan mentioned that there were several IMF commissioners who expressed concern that the sales tax hike would negatively affect the Japanese economy.

Bloomberg Japan's article (also in English, by Bloomberg reporter in Tokyo) also mentions IMF's fear that should the so-called "Abenomics" be imperfect, Japan's reliance on fiscal and monetary stimulus for growth may be a heavy burden to the rest of the world.


Scott said...

The BOJ Governor is full of shit and he knows it. The problem is noone will speak up and predict what will really happen which will be a grinding stop on spending and tighter business with little to no expansions. This will be another hard blow to people in the both affected by the 311 disasters as well. Expect less development and people moving back to that area when there's no money to spend.

The common resident of Japan will get hit twice as hard as they will be footing the added cost of daily goods. There's no way companies will eat the difference, they'll pass it to the customer in the form of service and price hikes. This is so screwed up.

Businesses will adopt an even bigger contract employee system than what we've got now which will create even more job instability and lower paying jobs.

The upper class of Japan is completely out of touch with the common citizen. I pray for all our sakes that the tax is put off indefinitely if Abe wants to hold onto his post a bit longer as PM.

Nathalie said...

Forgive me for I am just reading up upon the japanese government and the current economy. Living in Sweden, we are used to paying 30% of our salary in taxes, something that may sting a little at payday but goes to making the system, living circumstances, better. If you are wronged and make a complain, the tax you've 'invested' in helps you. If you are ill or want to your child to have the same opportunity to attend a good school without having to worry about a enormous tuition, your tax bounce back to you. I suppose it is not fair to those who are not taking advantage of the system and still has to pay the high tax, but in the long run I actually do not see anything wrong with high taxes. As long as you know where your money goes that is. ..

Anonymous said...

Nathalie, taxpayers in Japan know where their money goes - to big corporations, government corporations where politicians and bureaucrats land in a comfortable retirement. The social services are being cut back. The increased tax goes to pay the debt. Citizens do not have the system "to take advantage of".

Anonymous said...

Blind trust in government to do good for citizens is astounding to me, whether it is in Japan or in Sweden.

N said...

Isn't there something the normal japanese can do about? If everybody already know where it goes that is. I suppose you can't hold an election for every little matter but aren't the voters expecting their elected politicians to fulfill their needs, or at least try to. Even though I am not japanese nor is my nationality japanese, I have lived a short while in Japan and has come to see it as a second home so I feel angry and sad when I read about corrupt politicans (Well, they're everywhere not just in Japan), and the fact that they have been keeping vital information from the public. I myself can't bring myself to eat any fish from japanese east sea, even though the government says its not harmful.
I imagine Japan has a lot of problems to battle, not only the economy, but with the ongoing nuclear disaster, so maybe seeing to that old people receive their retirement money is not a priority (Somewhere I heard that jap government maybe won't give retirement savings to old people in the future?).
Blind trust is not something I share or think you should have in your government, but as a voter and a tax-payer I simply trust that the government the people elected does their job. Though recent years it has come to attention that some politicians in our government have been using tax money to pay for their extravagant 'business-parties' which has arisen quite a number of angry voters in Sweden.

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