Earlier this year, Japan implemented a sales tax increase from 5 to 8 percent. Bloomberg experts had predicted a median 7 percent decline, however, the economy declined by only 6.8%. And although an economic decline is never ideal, the contraction that has occurred in this quarter is much less impactful than in 1997, the last time the sales tax was hiked.
The benchmark Nikkei stock index did not change greatly in Tokyo and the yen was also considerably stable. For Prime Minister Shinzo Abe, it is entirely worth it to experience temporary hits in private demand in order to improve the nation’s financial status. The International Monetary Fund estimates that the government’s debt will rise to 245% of GDP by 2019, which means it is necessary for correction to occur in the country’s fiscal matters.
Still, an additional impending tax increase has many wondering if the Japanese economy can handle additional strain. In the next year, it is possible that the consumption tax rate will further rise to 10%. Before the tax increase occurs, an economic team will evaluate how the economy reacts in the third quarter of this year. In order to further rejuvenate the economy, Abe must also implement promised structural reforms, such as creating more workplace opportunities for women, which has yet to occur thus far.
Some even believe that the effects of the tax hike may already be wearing down. According to a purchasing managers’ survey, manufacturing activity expanded for the second consecutive month in July. As improvements have occurred in wages, consumer spending, bank lending, and housing starts, the Breakingviews Abenomics Index for the month of June sky rocketed to its highest score in 13 years. To learn more about the financial state of Japan, browse the country's economy page on globalEDGE.