Japan Risks Recession With Coming Tax Increases.
((Japan is so tough to gauge, FH. I tried it once with JOF, and got knicked. I have sinced resigned myself to watching closely, but nothing else.))
By SEBASTIAN MOFFETT
Staff Reporter of THE WALL STREET JOURNAL
January 17, 2005
TOKYO – Eight years ago when the Japanese government raised taxes, the move was blamed for killing the economic recovery. Now that taxes are heading higher again, some economists here are bracing for a possible return trip to recession.
The government hasn't quantified the size of the tax increase, but economists have their own estimates. A combination of new pension and social-security payments plus tax increases will mean an extra burden of about 7.2 trillion yen, or about $70.5 billion, over three years, starting this year, according to Jesper Koll, Merrill Lynch & Co.'s chief economist for Japan. He calculates that will slice about 2% off the total disposable income of the Japanese.
That isn't as big as the 1997 tax increase, which pushed the consumption-tax rate to 5% from 3% and along with other increases added about nine trillion yen to the nation's tax bill. Some consumers were so angry at the higher consumption tax that they staged demonstrations. Others simply closed their purses, a factor that helped to capsize economic growth.
While economists worry that history is about to repeat itself, government officials say the country's huge debts leave it little choice. Japan has by far the worst government-debt problem in the industrialized world. Debt outstanding now amounts to 169% of gross domestic product, and has risen every year since 1991, when it was 65%, according to the Organization for Economic Cooperation and Development. That compares with 65% of GDP for the U.S. now and a 78% average for the euro area, both lower than a decade ago.
Japan's problem resulted from ballooning public spending and falling tax revenues, as the government tried to stimulate the economy out of its 1990s doldrums. Japan now has a primary deficit -- the gap between tax collections and the national budget -- of 7% of GDP.
The new tax increases are the government's attempt to get a grip on the problem. A series of complex pension and social-security contribution increases has begun this year. Heavier tax increases are expected to pass Japan's Parliament in the next few weeks. This legislation will abolish part of a 1999 special income-tax reduction starting in 2006, which economists say will mean 180,000 yen, or about $1,800, more to pay for a four-person household with an income of 10 million yen, or about $98,000. A similar measure is planned on top of that for 2007.
These moves concern economists, who say the tax increases will discourage consumers from shopping, at a time when Japan really needs them to keep spending to boost growth. The economy is going through a slow patch now, remaining essentially flat over the most recent two quarters. If exports, Japan's main engine of growth, fail to pick up, badly timed tax increases could tip the economy into recession. "It's a tax-increase marathon," Mr. Koll says. "You're putting on the brakes when you're slowing down anyway."
So why can't Japan just erase its government debt with faster growth? After all, the U.S. escaped big budget deficits in the 1990s with relatively small tax increases, as fast growth fueled higher tax revenues.
But Japan is unlikely to get out of its debt bind so easily. For a start, its problem is much worse than that faced by the U.S. Japan's ratio of debt outstanding to GDP is already more than twice that of the U.S. at its 1993 peak, which was 75%. In addition to the primary deficit, Japan also has to pay interest on the money it is already borrowing. So, in spite of the tax increases, Japan's ratio will continue climbing to about 175% by the end of 2006, forecasts Brian Coulton, a senior director of Fitch Ratings' sovereign group.
Japan also can't expect economic growth that's powerful enough to wipe away its deficits. Prime Minister Junichiro Koizumi has been cutting spending since he took office in 2001, but the main cause of Japan's budget deficits is falling tax revenue. Tax revenue peaked in 1990 at 60.1 trillion yen, and plunged to 41.7 trillion yen in 2004.
"High growth like in America might solve this, but you can't expect that," says Mamoru Yamazaki, an economist in the Barclays Capital Tokyo office.
Ministry of finance officials say Japanese taxes are low by international standards and can be higher. The country's "national public burden," the sum of taxation plus social-security payments, is about 35%, almost the same as in the U.S., which has a lower proportion of retired people. The burdens in the U.K. and Germany are more than 50%, and are still higher in some other European countries. "Why should Japan be only 35%, when its society is so old and is growing older still?" said Koji Yano, an official in the Ministry of Finance's tax office, at a seminar last year.
Trying not to trip up the economy as happened in 1997, the government this time is attempting a stealthier approach to tax increases. The forthcoming round is being phased in over several years, and isn't expected to have the shock value of the 1997 consumption-tax rise.
If the economy returns to healthy expansion during the next few quarters, it will likely survive the tax increases, economists say. But if Japan continues to flirt with recession, the new taxes could make the economy contract. However, the Ministry of Finance and leading politicians plan even more tax increases for the future. In particular, an increase in the consumption tax is likely around 2007. "If you think about the economy, tax rises are bad," says Barclays economist Mr. Yamazaki. "But this will be the case any time, and you can't leave the situation like it is." |
