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):

日銀総裁、消費増税と脱デフレ「両立する」

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

日銀の黒田東彦総裁は８日の金融政策決定会合後の記者会見で、消費税率の引き上げとデフレ脱却との関係について「両立すると思っている」と強調した。「経済・物価情勢の展望（展望リポート）」で示した見通しを例に挙げたうえで、消費増税後の日本の景気について「前向きな循環は維持され、潜在成長率を上回る成長を続ける可能性が高い」との認識を示した。

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.

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