Japan to Raise Sales Tax from 5% to 8% (then to 10%) in an Effort to "Boost Economy"

That is what the politicians in the Noda Administration have been saying. Does that make sense? I don't think so. But nothing Japan has done, particularly after March 11, 2011, makes much sense.

Their reasoning is that people will increase their purchase significantly before the increase goes into effect in 2014, therefore boosting the economy. (Amateurs...)

It was not just DPJ (Democratic Party of Japan, ruling party) but LDP (Liberal Democratic Party which is nothing liberal or democratic) and Komei Party voted in favor of raising the sales tax from the current 5% to 8%. About 50 DPJ politicians, many of whom are aligned with Mr. Ichiro Ozawa, voted no.

The ostensible reason given to the Japanese for the tax hike is to pay for increasing costs for welfare and medical benefits for the elderly as the government reform the welfare system and the tax system. But there are only vague words of "reform", and the benefit for the elderly will be further decreased. There is no corresponding decrease in personal income tax, and there is no exception (such as on food items). In fact, personal income tax will be RAISED for the next 25 years to pay for the great "recovery" from the earthquake and tsunami.

Big corporations, particularly large exporters, are very pleased with the sales tax being raised. It won't hurt them, as they will continue to get tax refunds for the overseas sales if the products are made in Japan.

From Bloomberg News (6/26/2012):

Japan Sales Tax Risks Growth Grinding to Halt in 2014: Economy

Japan’s Prime Minister Yoshihiko Noda risks stalling the economy by pushing through a higher sales-tax that may damp consumption even as it aids efforts to tame the world’s largest debt burden.

The nation’s recovery after last year’s earthquake and tsunami could grind to a halt in 2014 when the first increase will take effect, according to UBS AG and Itochu Corp.

Parliament’s lower house yesterday approved the bill to raise the tax to 8 percent and then 10 percent in 2015 from 5 percent now. A slump would be a repeat of 1997, when an increase in the same levy contributed to pushing the economy into a 20- month recession, costing then Prime Minister Ryutaro Hashimoto his job.

“If there are no economic stimulus measures along with a consumption tax hike we can see around zero percent growth in fiscal 2014,” said Takuji Aida, a Tokyo-based economist at UBS, who raised his growth forecast for the year ending March 2014 to 2.9 percent from 2.2 percent because he sees a 4 trillion yen ($50.4 billion) rise in consumption and investment ahead of the tax increase.

A 1 percentage point increase in the tax would cut growth in real gross domestic product by 0.32 percentage point in the year after implementation, according to the Cabinet Office’s Economic and Social Research Institute.

Growing Debt Burden

Even with the sales tax increase, the government said in January that it will probably miss its goal of achieving a primary balance surplus, which excludes debt servicing costs, by fiscal 2020. It forecast a primary deficit of between 1.9 percent and 3.1 percent of GDP in that year, compared with the fiscal 2011 deficit of 7.4 percent.

Gross public debt will be 223 percent of GDP next year, up from the projected 214 percent in 2012, “pushing Japan’s public finances further into uncharted territory,” the Paris-based Organization for Economic Co-operation and Development said in a report last month.

Japan’s benchmark 10-year yield was 0.805 percent at 12:50 p.m today. It reached 0.79 percent on June 4, the lowest since June 2003 and the least globally after Switzerland’s. Five-year credit-default swaps for Japan’s bonds were 94 basis points yesterday, having slid 12 basis points since Noda took office in September, data compiled by Bloomberg showed.

The yen was trading at 79.44 to the dollar at 12:45 p.m in Tokyo, having strengthened more than 5 percent since mid-March. The Nikkei 225 Stock Average was at 8,707.64, down about 14 percent over the same period.

“Higher taxes will automatically shore up tax revenues even though an accompanying economic slowdown will somewhat reduce the amount collected,” said Hiroshi Watanabe, a senior economist in Tokyo at SMBC Nikko Securities. “Even so, Japan must raise the consumption tax to 16-17 percent if it wants to eliminate the budget deficit with taxes alone,” he said, adding “the government simply has to slash spending.”

(Full article at the link)

Mr. Watanabe has apparently never heard of the "Laffer curve".

Sales tax of 15% is what Christine Madeleine Odette Lagarde, IMF chief who pays no income tax on her IMF salary, recommends for Japan.

Prime Minister Noda probably couldn't care less about the angry public protesting outside the Prime Minister's Official Residence against the restart of Ooi Nuclear Power Plant. He got this tax increase bill passed, with the overwhelming support from the major parties. Ooi Nuke Plant may have served as an excellent diversion.

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