ESTILL SAVED argue about the merits of Abenomics, the experimental mix of policies introduced by Japanese Prime Minister Abe Shinzo seven years ago in an effort to drive out deflation and stagnation. But two lessons are beyond debate. The Japanese bond market is remarkably docile despite the government’s massive debt. However, Japanese households are painfully sensitive to the increase in the consumption tax, a large value added tax imposed on most of their purchases. After the government raised the tax from 8% to 10% on October 1, the economy fell at an annual rate of 6.3% in the fourth quarter of 2019, according to figures released on February 17 (see chart).
The increase in the tax was an unenforced error. The government has no immediate need for additional revenue. Despite gross debt close to 240% GDP, his loan remains absurdly cheap. The yield on a ten-year government bond is frozen at around zero, where the country’s central bank, the Bank of Japan (BoJ), fixes it since 2016. This attachment obliges the BoJ buy as much public debt as necessary to keep long-term interest rates low. Such determined efforts to stimulate borrowing are necessary primarily because private spending has been low – too low, at least, to bring inflation to the BoJThe target of 2% of the current 0.8%. The increase in the consumption tax was therefore doubly strange. This has made it even more difficult for companies to sell goods to inhibited consumers in Japan, in an effort to reduce the number of bonds that the Japanese government sells to a client who has sworn to bid anyway. It was like adding ballast to the waterlogged side of a ship.
The error was predictable and not forced. An increase in the same tax in 2014 was followed by an equally dramatic contraction in the economy, undermining the start of Abe’s reflationary push. The government had hoped to avoid repeating this experience by sparing food, newspapers and drinks (except alcohol) from the higher rate and adding various compensatory measures. These included free child care and education for preschoolers and a “rewards” system providing discounts to customers who make cashless purchases in small shops and convenience stores. These measures may have cushioned the blow in some respects: consumer spending on non-durable goods fell less in the last quarter than in the 2014 episode. Unfortunately, these compensatory measures were themselves offset by another aggravating factor: the impact of Typhoon Hagibis, which flooded many cities and killed nearly 100 people in October. As a result, business capital spending fell even faster than it did after the tax hike six years ago.
Prospects for a recovery in the economy are still threatened by the new coronavirus. Covid-19 has already killed a person in Japan; 73 were infected (not counting the hundreds diagnosed on a cruise ship docked in Yokohama, south of Tokyo). Japan is tightly integrated with Asian manufacturing supply chains which will be disrupted by factory closings in China. He also counts on the Tokyo Olympics, which will start in July, to cheer up and spend. This happy prospect must now be questioned. The government has already stated that only elite athletes can participate in the Tokyo Marathon on March 1.
Faced with these tax, weather and viral setbacks, how will political decision-makers react? Government announced fiscal stimulus worth approximately $ 120 billion (2.4% GDP), which will help repair the damage caused by the typhoons and protect the country from floods and other future disasters. But the money will spill over a year and may not add much to the previous spending path. the BoJ, for its part, seems largely out of mind. Inflation has consistently exceeded its target, which would require easier monetary policy. But the BoJThe multi-level interest system on the reserves that banks deposit with it, some of them earning a negative rate (-0.1%), is already unpopular with savers, banks and companies. insurance. An even lower rate could be counterproductive if it inflicts too much damage on Japanese financial institutions, which struggle to pass on negative rates to their own depositors.
A possible solution, proposed by Stefan Angrick of Oxford Economics, a British consultancy firm, would be BoJ to pay positive interest on more reserves, to strengthen the profitability of the banks, but to further lower rates on the rest, to stimulate borrowing. A tiered system like this helped the Swiss central bank bring interest rates down to -0.75%.
A twist is that the three recent disasters in Japan – raising taxes, the typhoon and the virus – are expected to put upward pressure on prices, even if they depress demand. This should prevent any return to outright deflation. But even policy makers who desperately want Japan to escape deflation have little preference for stagflation. ■
This article appeared in the Asia section of the print edition under the title “Typhoon, pestilence and tax”
