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14 Aug 2013
Flash: Impact of change in Japan's consumption tax hike method - Nomura
FXstreet.com (Barcelona) - Nomura Chief Economist for Japan Tomo Kinoshita and Senior Economists Minoru Nogimori and Shuichi Obata, have published a terrific report looking at 3 scenarios based on different tax sales hike proposals.
An expert panel will convene for the first time in late August to assess the impact of hiking the sales tax on the Japanese economy, with the "base-case" scenario being an increase the tax in by 3ppt in April 2014 and by 2ppt in October 2015
However, the panel is also due to examine three other proposals. "A 2ppt hike in FY14 followed by 1ppt hikes in subsequent fiscal years (Case 1); 1ppt hikes each fiscal year over a five-year period (Case 2); or a postponement of the hike for now (Case 3)" Nomura Economics Team observes.
In Case 1 and Case 2, Nomura Economists think that "FY14 real GDP growth would be lifted versus the base-case scenario (by +0.31ppt and +0.59ppt, respectively); however, given that the overall tax hike is the same as the base-case scenario in both cases, the cumulative impact comes to zero."
Under Case 3, "FY14 and FY15 real GDP growth would be lifted by +0.64ppt and +0.50ppt versus the base-case scenario, and that the cumulative boost would be about +0.7ppt" Nomura Economists added.
Nomura Economist also demystify the belief that a tax hike would be slowing down consumption meaningfully. "The experiences of the last consumption tax hike in 1997 have been often referenced, but we think the main factors behind the recession that took place in Japan at that time are likely to have been the Asian currency and financial crises" Economists said, adding that "the negative effects of the tax hike would be mitigated in large part by three government support measures (tax breaks, reduced consumption tax rates on certain items, increase in public spending in supplementary budgets)."
Lastly, Nomura Economists warn that "while Japan has seen few examples where fiscal instability has placed major stresses on financial markets, we caution that any postponement of the tax hike could throw the markets into turmoil and deal a severe blow to the economy as a whole."
An expert panel will convene for the first time in late August to assess the impact of hiking the sales tax on the Japanese economy, with the "base-case" scenario being an increase the tax in by 3ppt in April 2014 and by 2ppt in October 2015
However, the panel is also due to examine three other proposals. "A 2ppt hike in FY14 followed by 1ppt hikes in subsequent fiscal years (Case 1); 1ppt hikes each fiscal year over a five-year period (Case 2); or a postponement of the hike for now (Case 3)" Nomura Economics Team observes.
In Case 1 and Case 2, Nomura Economists think that "FY14 real GDP growth would be lifted versus the base-case scenario (by +0.31ppt and +0.59ppt, respectively); however, given that the overall tax hike is the same as the base-case scenario in both cases, the cumulative impact comes to zero."
Under Case 3, "FY14 and FY15 real GDP growth would be lifted by +0.64ppt and +0.50ppt versus the base-case scenario, and that the cumulative boost would be about +0.7ppt" Nomura Economists added.
Nomura Economist also demystify the belief that a tax hike would be slowing down consumption meaningfully. "The experiences of the last consumption tax hike in 1997 have been often referenced, but we think the main factors behind the recession that took place in Japan at that time are likely to have been the Asian currency and financial crises" Economists said, adding that "the negative effects of the tax hike would be mitigated in large part by three government support measures (tax breaks, reduced consumption tax rates on certain items, increase in public spending in supplementary budgets)."
Lastly, Nomura Economists warn that "while Japan has seen few examples where fiscal instability has placed major stresses on financial markets, we caution that any postponement of the tax hike could throw the markets into turmoil and deal a severe blow to the economy as a whole."