Weak exports, not tax hike, could stall Japan's recovery

BOJ, here we go again?

That is not a good sign.

Sounds like the begining of another blame game. We all knew this would happen but of course it's not the Japanese government's fault. Never is.

These days the yen to the $ is around 102, back pre the 2008 crash the yen was around 120 to the $ so perhaps there is some correlation to that some would suggest. Effectively the yen is still too high to really have the desired effect, it needs to drop another 10 to 15 points.

I don't know much about economics outside of what I learned in high school and a marco economics class in college, but it sounds as if the BOJ is doing all it can do to manipulate the economy to sustain this illusion of growth when really it seems like the majority of the country's export economy rests on two industries: automobiles and electronics (people can only buy so many TVs and cars). I don't think there will ever be a substantial amount of growth in Japan and I believe we'll continue to see these small rise and falls until the economy diversifies itself a bit more.

But Abenomics works! Doesn't it? :P

"But it’s true that exports remain the biggest risk to the outlook,"

Err. wrong again. The biggest "risk to the outlook" is the consumption tax hike. The govt effectively removed consumers' purchasing power when insufficient private consumption is the very root of the problem. How stupid is that?!?

Exactly how does the BOJ expect Japan's economy to grow? The majority of goods produced in Japan are consumed in Japan, and the tax hike can only reduce the sales of these domestic companies. Next, since the domestic economy is the main consumer of Japanese goods, the decreasing population (which is reducing the pool of consumers by about 300,000 people per year) is also reducing sales, and the resulting revenue. Last, with other countries continuing their "easing" policies, their currencies are being driven down, so the yen cannot gain any exchange advantage. But even back in the days when the exchange rate was 140 yen to the dollar, the Japanese economy was already sliding deeply into the red, as Japan was being undersold by Chinese and Korean competitors.

Now the best we can hope for is an exchange rate of 120 yen to the dollar, but this is very unlikely while the FED and EU continue printing money to pay their bills. Added to this is the fact that competition to Japanese industries from other parts of Asia is increasing. That the BOJ "miscalculated" on projecting future exports is hilarious, they are either lying, or are hopelessly incompetent.

Japan needs the economy to grow, and since domestic spending is still the main source of private sector revenue, any tax increase is going to reduce this revenue, and reduce growth. The reason given for raising the tax was to reduce the spending deficit, yet spending increases have already negated any extra revenue which will be collected, and if the economy contracts, which it probably will, tax revenue will decrease, increasing the spending deficit and resulting debt.

The only option which the government refuses to consider is to limit it's spending. This was the very first thing it should have done. Instead, it decided to borrow and spend even more. This has to stop.

Yep, as I keep saying, they built their recovery strategy on international markets that no longer exist. The car and electronic markets are no longer dominated by Japanese products. You only have to look at how many people have lost their jobs in these industries to know there is no longer a strong market for them. Yet, these old cronies keep putting all their eggs into this basket. The only companies that are doing well in Japan are those that have evolved and innovated into exporting newer technologies. The end result of this will be a recession and possibly even a depression of the economy. Move over Spain! Here comes japan!

Bursting the bubble that Japan experienced in the 1980's was a sensible policy. Stratospheric land prices were turning Japan more than ever into a nation of haves and have-nots. But successive governments considerably underestimated the dynamics of asset deflation. They evidently failed to see how confidence would be damaged among consumers whose companies were hit by the declining market.

The reason given for raising the tax was to reduce the spending deficit, yet spending increases have already negated any extra revenue which will be collected, and if the economy contracts, which it probably will, tax revenue will decrease, increasing the spending deficit and resulting debt.

In the words of Mitt Romney, I'll bet you 10 thousand dollars that tax revenue will increase this fiscal year, thanks to the sales tax hike. Let's review a year from now.

But I do agree that a temporary spending increase to try to cushion the impact of the hike on consumption seems kinda stupid. It might help paper over the impact on paper but for most people who don't see any of the stimulus spending it doesn't really help, and puts Japan a little further in the hole. Extra consumption tax revenue alone isn't going to balance the budget, let alone reduce the deficit.

The only option which the government refuses to consider is to limit it's spending. This was the very first thing it should have done. Instead, it decided to borrow and spend even more. This has to stop.

Agree. I was reading something from I think the OECD the other day which claimed that Japanese government spending was actually quite frugal on most areas relative to other countries. The one that puts Japan in the hole is all the pension and social security programs.

" But the BOJ has been notably wrong about"… everything!

Devaluation of the yen by unprecedented "easing" has failed by longshot(to boost exports). Domestic manufacturing has been declining more and more, largely due to regulatory and tax costs as manufacturing is quite simply cheaper elsewhere, resulting in increased hollowing of industries. The tide has turned and is not ever coming back. The result of Abe's misguided arrows plan is largely increased import costs at a time that the trade deficit is ballooning. The trade deficit quadrupled year-on-year to ￥13.75T as of Apr21. Japan has posted its largest-ever deficit with EU(exports: ￥7.2T / imports: ￥8.0T / bal: ー￥700B), largest-ever deficit with China(exports: ￥13.0T, imports: ￥18.6T, bal: ー ￥5.6T), largest-ever overall deficit fiscal 2013(exports ￥ 70.9T, imports ￥ 84.6T, bal: ー ￥ 13.7T)

The repatriation of income from overseas investments means it still runs a current account surplus, but that's like watching your back account balance dwindle as your monthly expenses outpace your monthly revenue.

Crude oil prices soared 16.6% in yen-denominated terms, but in dollar-terms it fell 3.4%. The financial value of crude oil imports to Japan rose 18.4% while the actual VOLUME of imported oil only went up by a meager 1.5% according to Finance Ministry reporting.

For fiscal 2013, the value of goods, services, and investments that left Japan exceeded those coming in by ￥789.9B, plunging 81.3% from ￥4.2T the previous year. That 2013 figure is the lowest since the Finance Ministry started keeping comparable data in 1985.

Further "easing" can only have similar effects.

"In the words of Mitt Romney, I'll bet you 10 thousand dollars that tax revenue will increase this fiscal year, thanks to the sales tax hike."

Which would be pointless if the hike puts a drag on growth. Because then, the govt will have to spend that money as stimulus to undo the damage that the measure created in the first place. Boing!

The lesson: stimulus and anti-stimulus measures have a tendency to cancel each other out when implemented at the same time.

sangetsu03 yet spending increases have already negated any extra revenue which will be collected,

Do you have some real data or a link to support this ?

John Galt Devaluation of the yen by unprecedented "easing" has failed by longshot(to boost exports).

The devaluation of the yen boosted exports greatly from where they were sitting prior to the yen dropping to its current limit, so this is incorrect, in fact exports started to recover once the yen dropped to around 100.

The bright boys at the BOJ might also consider how the average household in Japan is weathering the tax increase.

It all belies the popular image of omniscient, omnipotent bureaucrats skillfully manipulating the levers of Japanese finance and industry.

" The lesson: stimulus and anti-stimulus measures have a tendency to cancel each other out when implemented at the same time."

Yes, the Broken Window, or Dig a Ditch To Fill It Up. Keynesian failure redux.

What is this article in almost total anonymity?

"The BOJ's main scenario is for exports to gradually pick up. But it's true that exports remain the biggest risk to the outlook," said an official familiar with the BOJ's thinking.

Some analysts say that if exports remain feeble, the BOJ may be forced as soon as July to expand its stimulus by ramping up its purchases of government bonds and other assets.

"That's why the BOJ needs to cling to its projection that exports will recover," said a former BOJ official with knowledge of the central bank's thinking.

"Japan won't return to the days when the weak yen had a more direct impact on exports," said one official.

If you look back at the history of BoJ policies since 1980s, you will find that the long standing policy of BoJ is to create an economy that is not dependent on exports. If you look at the unemployment ratio in the same BoJ report, it hit record low since 2000 in spite of "weak" export. BoJ earned the present situation.

GDP measured economic growth has been dependent mainly on ever greater numbers of people using ever greater amounts of energy. The graph below shows this. Even when Japan's rise in energy consumption slowed after the energy shocks of the 70s, energy efficiency measures and population growth could keep GDP rising, but only to a limit. Now population is declining and further energy cost issues has led to a decline in GDP. This will continue until the population drop bottoms out past mid century and no amount of Abenomic hype or credit easing will change this trend. That is just part of class warfare intended to further shift public money to the super-rich.

It is time for the people of Japan and its leaders to start shifting the talk to alternatives to GDP, such as the Green GDP proposed by Niu Wenyuan.

http://en.wikipedia.org/wiki/File:Japan_energy_%26_GDP.png

Link on relationship between historical population growth and energy http://www.resilience.org/stories/2009-04-20/peak-people-interrelationship-between-population-growth-and-energy-resources#

Which would be pointless if the hike puts a drag on growth.

If it does, yes it would be pointless in terms of growth, although stimulating growth was not the purpose.

But I'm not convinced people are going to seriously stop buying stuff because of the 3% consumption tax hike.

Because then, the govt will have to spend that money as stimulus to undo the damage that the measure created in the first place.

Such a policy response would indeed be sure to render the tax hike entirely pointless.

I expect (hope?) the government to realize at some point that there are ways to stimulate growth without mindlessly hosing money about the place.

Actually, the reason for the sales tax increase was to lessen the world's largest public debt, but a 3% increase has resulted in a 10-20% drop in spending, mostly because the government let the corporations keep their tax cuts and not pass them on as salary increases. You don't have to be an economist to work out why that is a huge fail. The further result of the drop in spending will be a major price hike in commodities, which will create a run-away inflation scenario forcing the Japanese economy into a depression. Japan desperately needs to join the TPP to flood the markets with cheap imported goods and increase spending. The Japanese believe that, globalization means increasing exports, but it's a two way street. Japan has to make foreign investment appealing. Japan cannot fix its economy without it. There is not enough money in Japan to pull itself out of this poop.

In the words of Mitt Romney, I'll bet you 10 thousand dollars that tax revenue will increase this fiscal year, thanks to the sales tax hike. Let's review a year from now.

Gross revenue may increase, but net revenue will decrease. The government has already spent 5 trillion yen to "offset potential reduction in growth" in addition to other "stimulus" measures which have also been impelemented. Increases in revenue were erased even before the tax was implemented.

Over the next five years, the population will fall by another 1.5 million, further reducing the number of taxpayers and consumers. The increase in the tax will fully flex it's muscles in the economy, taking more money out of the private sector, where it usually generates a positive return, and get absorbed into the public sector, where it usually generates a negative return.

We cannot forget that the tax did not increase a mere 3%, as the consumption tax in Japan is applied at more than one level of exchange. The net increase is closer to 8%, and this is a significant number. If the tax is fully raised to 10%, the effective rate is more like 30%. And unlike Europeans or Americans, the Japanese have to pay this tax on food, medicine, medical care, and services as well as goods.

There will be no reductions in the deficit, and certainly no reduction in the debt. But the people will have less of the money they worked so hard for.

The BOJ is also starting to cite “structural factors” for the disappointing performance—Japanese manufacturers continuing to shift production overseas and some, such as electronics exporters, possibly losing their competitive edge to rivals in South Korea, Taiwan and elsewhere.

Bingo! De-valuing the yen was a great strategy 20 or 30 years ago -- when Sony was king and Japan truly had superior, or at least highly competitive products. But making the yen cheaper does not overcome second-rate products. Just look at Nintendo/Wii.

Weak exports, not tax hike, could stall Japan's recovery

very sad that unlike "Forced" inflation And tax hike at home, Japan can not "force" the world to buy their products and boost exports (!)

sangetsu

Over the next five years, the population will fall by another 1.5 million, further reducing the number of taxpayers and consumers.

What if this 1.5 mill people were those collecting the pension would that not reduce the govt's outflow of funds, being the pension payments and health care bills would reduce by that much?

I am sure its not the younger ones who would account for the decline in population but in fact the older ones dying that would be reducing the population surely. Therefore less pension payments !

Disillusioned,

The further result of the drop in spending will be a major price hike in commodities, which will create a run-away inflation scenario forcing the Japanese economy into a depression.

I don't follow that one. Why would commodity prices increase because of a purported drop in spending? On the contrary to me that sounds like commodity prices would be more likely to drop, as demand would decrease (not that factors in Japan drive commodity prices that much).

sangetsu03,

Increases in revenue were erased even before the tax was implemented.

Only for the first year though, I believe. I'm giving the government the benefit of the doubt at the moment, expecting them not to decide to pump more money again next year (silly me?).

The increase in the tax will fully flex it's muscles in the economy, taking more money out of the private sector, where it usually generates a positive return, and get absorbed into the public sector, where it usually generates a negative return.

The thing is, the government already blew the budget and it's in the hole. Obviously tax isn't going to help growth, but something has to be done about the money the government already borrowed and spent too, as well as trying to bring the budget under control.

And unlike Europeans or Americans, the Japanese have to pay this tax on food, medicine, medical care, and services as well as goods.

This is one of the most attractive parts of the tax, IMO. If you have to tax, simple is best.

There will be no reductions in the deficit, and certainly no reduction in the debt.

I think it's the most responsible option though. Just giving up on the debt situation entirely could just bring forward a day of reckoning, and a nasty scenario like that'd be no good for the working people either.

What if this 1.5 mill people were those collecting the pension would that not reduce the govt's outflow of funds, being the pension payments and health care bills would reduce by that much?

This number does not soley represent the number who have died, but also those who were not born. Those who are never born will never work, and will never add to the commerce or economy, nor support those who will eventually become too old to work.

mostly because the government let the corporations keep their tax cuts and not pass them on as salary increases.

During the boom years Japan's corporate tax climbed to the current level, which is 38%, the highest of all industrialized countries. This tax is not paid for by corporations, but by the customers of corporations, people like you and me. The corporate tax results in higher prices for good and services which corporations provide. All you need to do is go to a store and see how expensive goods are in Japan, and a great part of that extra cost is because of the taxes levied on it's makers. This added cost has helped price Japanese goods above the price of Chinese and Korean goods, and has been the primary motivator behind Japanese companies moving production overseas. Most companies pay more for tax than they do on payroll, and with most Japanese companies running a negative balance on their balance sheets, increasing payroll is not as easy as Abe seems to think it is.

The one simple fact that people overlook when it comes to progressive taxation is that it isn't really progressive. If taxes are raised upon the poor, their income is reduced, and they have less money to buy goods or pay for services. This reduces demand for goods and services. The rich are the main providers of goods and services, and when the poor can't buy as much, the rich make less money. On the other hand, if you raise the tax on the rich, in order to stay rich, they will increase the cost of the goods and services they provide, which means that the lower classes must pay more, which once again leaves the poor with less money to buy goods and services, which in turn reduces the amount of money the rich make. To keep selling their goods, the rich must find a way to lower the cost, and this is often done by reducing pay (including their own) outsourcing, or cutting staff. Regardless of which party you tax, both parties pay, plain and simple. There is no way to isolate a tax to any part of the economy, it is not possible, and it never has been. The stamp tax paid by a smoker on tobacco is money that he will not use to buy groceries, and since he doesn't buy as many groceries, his lack of custom is made up for by the grocery store by increasing the price of groceries to mantain the store's profit margin. So non-smokers end up paying for the smoker's cigarette tax.

The problems we have with economic growth nowadays are a misallocation of resources, namely money. For a business person like myself, I try to use my money to make more money. I use my money to buy goods from local producers, and I sell these goods for a profit. The producers do the same. They buy their materials, apply their labor, and add what they can to the price for the cost of their labor. These producers will invest 300 or 400 yen in materials, and add as much as they can get away with to their selling price. For their 300 or 400 yen investment, the end up with 3000 or 4000 yen. I cannot make these goods myself, as I don't have the skill. But unlike my producers, I have the skill to sell goods on the international marketplace, meaning that I can get a better price than they can. I pay 3000 or 4000 for their goods, and sell them for 12000 to 15000 yen. I need to charge this much because I have to pay taxes and overhead, and have something left over for myself. For higher quality goods, I pay much more, and of course sell for more. My suppliers make their goods with as much skill and economy as they can to increase the return on their investment and time, and I do the same when it comes to selling these goods.

This is how the private sector works. One must be very careful and economical because there are many competitors. One tries to get as much return for a product or service, while setting a price which people can afford. A little greed pays a part. If I can come up with a new item, or find a way to get more customers, I can sell more. To sell more, I will need to buy more goods, provide more services, etc. To make more goods, my suppliers will have to buy more materials and hire help, and economic growth occurs. This is how capitalism works, it is very simple, no degree in economics is required.

On the other hand, the public sector works more or less in the opposite direction. For the most part, government jobs are well-paying and secure. One has to do something quite spectacular to lose one's job, or even get a pay cut. There is no motivation to improve the quality of services because there is no competition. Governments monopolize a great many parts of our national economies. A government department's funding is based upon how much it spent the previous year, so in order to get more funding, departments spend as much as possible. More funding means more opportunities for advancement, more contracts for politicians to award, etc. In this system, there is a negative return on investment. The amount of goods and services provided by the government has less value than the time and money used to create those goods and services. Put the money you are paying for your national pension in the bank instead of paying it into the national system, and you will have a great deal more money when you retire. Put the money you pay for the national health plan in the bank, and you are also more likely to come out ahead.

The problems we have with economic growth in developed countries is that the public sectors are consuming too much of our financial resources. Money paid in tax for public sector services is money which cannot be paid for buying more goods and materials, hiring more staff, etc. As the public sector grows, the private sector must shrink, and so must the economy. In 1960, national government spending made up only. 17.5% of the economy. In 2014, national spending is now almost 40% of the economy. Growth cannot occur in such an environment.

"Weak exports, not tax hike, could stall Japan's recovery"

No, Weak exports and tax hike will stall Japan's recovery.

Printing money was not the way to go...

Having experienced the great earthquake/tsunami and the manipulation/lies that came afterward from the Government here, I dont trust anything any Japanese politician says. Of course the BOJ will tell us all is well, its just part of the culture here. It gets them through bad times, true, but you can never take their word for anything.

5petals, since Abe changed the laws for journalists at the end of last year, the media won't report anything negative. Everything is spun this way. Criticizing Abe is dangerous and the media is ever-compliant. We hardly hear anything about the nuclear plants in Fukushima anymore because the club is not allowed to report news the government doesn't want reported. All governments tell lies, as do all politicians, but in most western societies a free press will out the truth. Not here though. Abe's policies will cause misery for most people, but the Japanese appear to like misery the way Brits like me enjoy complaining.

The BOJ/Abe policy is actually very simple. Use QE to a ludicrous extent to manipulate the yen and create price inflation so that the debt can be serviced. Tax people more and more and redirect the money to big business that supports the government. The BOJ is not independent of the government and is staffed by people put there by the government and will print never-ending amounts of money to support government policy. NHK is similarly staffed by Abe's supporters and there is a law that stifles any journalism that the government doesn't approve of so there is no real voicing of concern about anything Abe does or anything the BOJ does. A few weeks ago the media claimed that because people were eating cheap gyudon and visiting cheap barbers that the economy was unaffected by tax increases. The media will carry on this pro-Abe bias as long as Abe's LDP is in power, and as the governments here are elected by old people in rural constituencies and not young people with families, nothing will change anytime soon.

5petals, since Abe changed the laws for journalists at the end of last year, the media won't report anything negative. Everything is spun this way. Criticizing Abe is dangerous and the media is ever-compliant. We hardly hear anything about the nuclear plants in Fukushima anymore because the club is not allowed to report news the government doesn't want reported. All governments tell lies, as do all politicians, but in most western societies a free press will out the truth. Not here though. Abe's policies will cause misery for most people, but the Japanese appear to like misery the way Brits like me enjoy complaining.

Abe has no real power, no prime minister had had much say in the way things are done since the time of MacArthur. The power in Japan rests mainly in two places, the zaibatsu (known nowadays as Japan Inc.), and the permenant bureaucracy, which consists of appointed ministers who oversee different parts of the government. Politicians come and go, but the unelected bureaucracy is more or less permanent. The bureaucrcy is controlled by Japan Inc, who hire reitred ministers, or their friends into high positions in their companies in exchange for favors.

The bureaucracy and Japan Inc. are the ones who control things, and use the elected politicians like a rubber stamp to approve the things they want done. In places like America, the secretaries of the various branches of the government serve at the pleasure of the president, and can be fired or replaced by the president merely uttering the words "you will be replaced tomorrow." In Japan the opposite is more true. The prime minister cannot easily get rid of these people, but they can quite easily get rid of any politician they don't like by exposing things like "loans" to the newspapers, which of course Japan Inc, owns and controls.

This system came about mainly because of cultural reasons. The Japanese are hardworking and intelligent, and are great doers. But they only work hard or do things when told to do so by someone else. The respect to authority in Japan is nearly the same as it is in the military in the west. Japanese are taught from a young age to respect their seniors, do as they are told, and not to be the nail that sticks out. This is why the bureaucracy and Japan Inc. can get away with all of the nonsense they have put the country and the people through. The people don't complain about the situation, just like they don't complain if their soup is served cold at a restaurant.

Things in Japan will only improve when the regular people get tired of being walked on, and decide to take control of the direction their country is heading.

StormR, yes there was some increase in exports, but not nearly enough to offset the rise in imports. That's the "not by a longshot" point.

sangetsu03,

I am all for smaller government in general, but on this:

The stamp tax paid by a smoker on tobacco is money that he will not use to buy groceries, and since he doesn't buy as many groceries, his lack of custom is made up for by the grocery store by increasing the price of groceries to mantain the store's profit margin. So non-smokers end up paying for the smoker's cigarette tax.

Increasing tobacco tax deters people from smoking, and so smokers actually have extra money to spend on other stuff since they no longer waste it on smokes.