OECD says Japan should raise sales tax again next year

I guess it never occurs to politicians and government minions to reduce spending instead of raising taxes.

Well OECD is filled with a bunch of idiots.

They could start by halting aid payments to China imo.

And then borrowing it back off them with an interest rate attached.

Imo.

But.....at the end of the day, you gotta pay your debts people.

Tax raises are necessary for Japan, but it will only work if also the wages for the people improve. Give the people more money and they will spend more. But so far this didn't happen. If the companies refuse to do so, the government has some tools in their hands, like raising the minimum wage to like 1500Yen per hour. If Japan only raise the taxes and the wages stay at the same level people will tigthen their belts.

Is the OECD trying to tank the Japanese economy? They obviously didn't look at the results of the last tax increase.

Well OECD is filled with a bunch of idiots.

And that brilliant conclusion is based on what? Other than your opinion.

Is the OECD trying to tank the Japanese economy? They obviously didn't look at the results of the last tax increase.

Hardly. What they looked at was the staggering debt load Japan is carrying and what happens if the interest rate on that debt rises due to increased concern about the J-government's ability to raise funds. Even a small increase in that rate would increase Japan's costs by billions of yen. And where does that come from if you don't raise the tax rate?

Mix Socialism(albeit a "soft" version in Japan) with unbridled Keynesian foolishness, and what you get is this kind of nonsensical economic spiel.

OECD is really OCD: Obsessive-Compulsive Disorder of collectivist politicians bent on impoverishment of the masses to the benefit of the ruling class.

Hardly. What they looked at was the staggering debt load Japan is carrying and what happens if the interest rate on that debt rises due to increased concern about the J-government's ability to raise funds.

The problem is, if people stop spending because of the tax increase (as has happened), then the net result to the economy is worse than if they had not changed the tax rate. I agree something needs to be done about Japanese debt, but increasing the tax rate has already been proven to not work by this last tax increase.

Japan has way too much pork-barrel spending. One example of this can be seen by driving up in the mountains, and finding paved roads in the middle of nowhere, on roads used by almost no one. There are thousands of other examples.

Gotta be some pain eventually, might as well get it over and done with, because they cant keep pushing it down the road for too much longer. In 2 or 3 years the sales tax rise will be unforgotten.

It's a perfect storm, high debt, low pay, tax up, no so much spending, low birth rate, company's moving off shore. And the political leaders wringing their hands and saying all is well. Guess this will end...in a bubble burst. Small bubble pop. Print more money devalue the yen more and more increasing debt. Great.

the tax rise had hit the economy harder than expected

Really? Not expected by whom? From what I saw, EVERYBODY expected the economy to tank after the last tax increase. It's common sense.

Burdened Japanese companies may rather keep whatever money they might make from this tax setup rather than increasing the income of it's employees.

The probably fewer than 50% of the working population "Salary men" have no choice but to pay the correct amount of income tax, whereas self employed, crooks and whoever find a way of paying very little. If I were PM, I'd be evaluating the potential increased revenue of cutting income tax by at least 10%, and raising sales tax by the same amount. Not only would you be taxing those who avoid income tax, but the increased net income of salary men might be spent on buying goods on which he pays sales tax. The biggest losers and complainers would be the income tax dodgers, whereas the salarymen might feel quite happy to choose how he spends his higher net income. As in a few countries already, to avoid hardship to the poor, essential items such as food, medicine, heating oil and children's clothes could be zero rated for sales tax.

And here is Abe giving us the finger. Get ready for the ten percent. This means that people living on the edge of poverty in Japan are going to fall off. The rich and well off will be just fine. They can give luxury goods at discounts.

This is silly. Everyone seems to fall into the fallacious argument of "raise the sales tax (disaster), or don't raise the sales tax (disaster.)"

As if these are the only two choices at Japan's disposal! As if the sales tax is the only tax in existence! As if the Japanese government's spending priorities and budgetary funding processes aren't also responsible for the "lost quarter-century." As if Abe's militarist dreams of glory won't add to the fiscal woes, while decreased consumption is the answer to all our problems! Come on!!

When a country's not growing, I'd think that consumption would be the last thing you'd want to penalize or make more costly...but no... Since every single person working for the OECD makes an income that would put them in the top 5% of the Japanese income pyramid, expect more "advice" that fleeces the poorest and makes life meaningfully harder for most of us, while the rich as always seem to escape any hint of fiscal discomfort or sacrifice...

Shortly after the tax increase was implemented, Abe and his cronies announces a several hundred billion yen 'incentive package' for businesses to 'increase investment and hiring', even though some of those businesses are riding on their largest cash reserves in history. It has been proven that these monetary gifts have very little direct effect on hiring and capital investments (within large corporations at least). The massive debt problem isn't due to under-taxation or flat wages. The main problem is the same as it has always been in Japan - government corruption and waste.

This is just going to keep getting worse, until...

...it keeps getting worse.

Rising taxes kills the economy, which requires more government spending, which requires more debt, which requires more money to SERVICE the debt, which requires more taxes...

Amari told the Financial Times in an interview the rise to 10% was “necessary”.

あまり好くない...

Hardly. What they looked at was the staggering debt load Japan is carrying and what happens if the interest rate on that debt rises due to increased concern about the J-government's ability to raise funds. Even a small increase in that rate would increase Japan's costs by billions of yen. And where does that come from if you don't raise the tax rate?

You, and other supporters of the tax hike, are forgetting that tax revenue is derived from economic activity: goods and services being bought, profits made, wages paid out.

So far, the economy has contracted as a result of the tax increase, so the government isn't going to get the big pay off it has been counting on because the economy is shrinking. Plus, wages are stagnant. How are people supposed to spend more on the same income? Where will this virtuous consumption come from?

It would have been far better to leave the sales tax at 5%, and focus on economic growth first. PM Abe seems more open to free trade. Free trade creates jobs, and opens markets for business.

PM Abe cut business taxes, but, they remain very high at 35%. Lower than the US and other nations, certainly, but still very high. The overall rate should come down to 25%. This would allow employers to give out healthier salary increases, and put more money to growing their business.

Taxes on people across the board are numerous, and add up to take a huge chunk out of working salaries. High inception fees for cars, sky high national health insurance premiums, taxes on houses and the land they're on, toll roads, etc.

Lower taxes on incomes leaves more room for discretionary spending. More discretionary spending, more money for business, more revenue for the government to tax.

The sales tax hike was poorly timed, and really should've been done during the boom era. What Abe has done is close the barn door long after the horse as gone over the horizon. Tax hikes are no longer effective. Indeed, they haven't led to serious reductions of sovereign debt, especially when spending hasn't been brought under control.

The Japanese government hasn't tackled spending, waste, or inefficiencies in a serious ways. Without cuts to spending, the debt will grow.

Japan's national debt is high because of reckless, unnecessary spending. The idea that Japanese people hadn't been taxed enough is fallacious, and unsupported by the facts.

Raise taxes-sensibly-after the economy is growing at a healthy, robust rate. In the meantime, spending needs to be reined in, and the government needs to get off people's backs, and out of their pockets.

Like most people I hate taxes BUT pay'em (Conway I am self employed, do tell me how I can easily cheat on my taxes please I need your advice LOL!!).

The biggest problem as I see it, is that govt spending has been way outta control since the 80's, our taxes are spent, stolen, kick backed, amakudari'd,,stockpiled in slush funds, etc etc etc....................

I figure taxes being paid now could be cut overall by around 30% EASY if govt just took a tiny bit of responsibility for our hard paid taxes. But alas they clearly just don't give a %$%%%^^$#@#%^^!

So instead they can only focus on consumption tax & increase it this is so frigging WRONG!

I would gladly pay 15% consumption tax IF the govt cut spending by 20% minimum, lowered income tax for working stiffs, merged & lowered a lot of the silly little taxes, as a self employed I pay income tax, business tax, consumption tax, 2 kinds of property tax, BOTH local taxes & health ""insurance"" are really INCOME taxes & I know I am forgetting some, its bloody insane.

Like I said I will GLADLY pay my fair share, but when I see my taxes being pilfered & wasted 24/7 it is depressing!

Oh & one more thing J-govt & this is a biggie, OVER 70% of J-companies NEVER PAY ANY INCOME TAX, they foist it onto their employee's to pay, THERE IS A DAMNED GOLD MINE THERE THAT SHOULD BE MINED & MY & everyone elses taxes LOWERED.

Then you might see more $$$$$$$ circulating in the economy, as of now people of Japan are MAXED out tax wise, so its unwise to increase taxes without doing the other things mentioned above that MUST be done!

The OECD is all about controlling the world's wealth, and taxing everone else into serfdom. It was not supposed to be this way. A free people work hard to support themselves, they take the responsibility to provide for all their needs. But we have gradually given governments control of our safety, pensions, healthcare, and more. We have given up many of our personal responsibilities in exchange for many of our freedoms.

We cant't forget that those in governments are not people who work selflessly to serve the people who pay them, these bureacrats are as greedy and ambitious as any corporate-type person. They work tirelessly to find more ways to spend your money, usually spending much more of it than they have. Then they have to squeeze more tax out of everyone else so they can continue spending.

So downgrade middle class family to poor and poor class to poorer. Rich will not do good either as people will stop spending a lot and will hurt their business (means more job scarcity). I doubt that this will boost Japanese economy curve but sure will boost -ve population curve. Go ahead and put Japan in #5th (skipping #4)

“Japan’s public debt has surged in the past few years, in a way that makes it comparable to Greece’s,” Tamaki told reporters in Tokyo.

Greece is a small European state that doesn't have its own currency. It's totally at the mercy of German bankers and politicians. Why compare Japan to such a place? Sales taxes are regressive and depress consumer spending among ordinary people. Everybody knows this except Japanese elites, it appears.

like raising the minimum wage to like 1500Yen per hour. yes the gov could do that but they have no power stopping companies moving more manufacturingto cheaper countires, less jobs means less tax revenue, more money needed to support the unemployed. add to that the army of retired folk you are prepared to work for 700yen/hr to suppliment there pension. my gardener is a retired guy who i pay just that, why would I pay a gardening company 3x as much to do the same job

"Abe has declared himself “neutral” on a further tax jump and said he would be watching the economic data carefully."

Yeah, so then when he raises it of his own volition he can declare it was not his fault. I like Tamaki's statement that, "Not only should we raise the tax again, but we should let people know what we are thinking of doing with the money and where we are headed in the future!" Morons. They'll raise it, for sure, and when the "economy suffers" as a result it'll be shouganai and more spending.

You, and other supporters of the tax hike, are forgetting that tax revenue is derived from economic activity: goods and services being bought, profits made, wages paid out.

JBinJapan -- please don't assume what I am "forgetting". What I am NOT forgetting is that Japan is in the perfect storm from a fiscal standpoint -- the population is aging and shrinking; as a result the social costs of the country will continue to rise; and, the current debt of the country is so high that the debt load simply cannot realistically go much higher. Your "derived from economic activity" statement is true, but is assumes that the economy will grow, which will push tax revenues up. Read between the lines here, folks, the OECD, is basically saying that they do not believe the Japanese economy will grow so the only real solution is to raise taxes. That is the ugly reality.

Again I say, exemptions for food and medicine please. Also some tariffs and middlemen fees will need to be reduced. Otherwise it will hit rents as prices drop (I am assuming already that big companies will not cooperate with pay increases). Something will have to give. You can control some of the variables, but not all of them in economics.

sigh, it your going to raise taxes, don't raise it for food, meds or things that you need to live off, tax things that people buy with disposable income....

Shops which only display meaningless prices without sales tax included (like most convenient stores, it seems) make me sick. Am I supposed to do mental aerobics by working out what an additional 8% works out to on all the items I've bought? Because I feel like it's a pathetic attempt to dupe me into believing the prices are actually lower than they really are, I refuse to shop at these places anymore.

RAISE WAGES! It's beyond a joke now...

People are expecting the move to 8% anyway, thats why they spent so much on big ticket iems before the 1st increase. Now the have nothing left and some have debt. Pitty they put it on credit cards and HP, they end up paying more in the end with interest. With the GDP ratio the GOV really has little choice if it wants to be a part of the international economy and trade. Would you do business with a bankrupt?

10% it shall be from 2015. It is the lowest in industrialised countries. Even Kenya has VAT of 16% across the board!

10% it shall be from 2015. It is the lowest in industrialised countries.

Some states in USA have no sales tax. Only 8 states have "sales tax plus max local surtax" at or above 10%.

https://en.wikipedia.org/wiki/Sales_taxes_in_the_United_States#Summary_table

zootmoney, same here. I won't even go to Starbucks anymore. Abe and his band of liars deliberately enacted a law saying that the full price of goods no longer needs to be displayed on products. If I don't have the option of paying the displayed price because tax was not included, it should not be displayed. The whole idea is that you are supposed to be duped into believing things are cheaper than they are. Abe is a liar on every level and this attempt to pretend things are cheaper than they are is disgusting. The tax will rise to 10%. It is a done deal. The "deliberating" is just Abe's way of pretending he gives a toss about normal people, but "regrettably" he will be "forced to" increase the tax again anyway after giving the matter "serious consideration".

but "regrettably" he will be "forced to" increase the tax again anyway after giving the matter "serious consideration".

And as a result, prices go up, sales go down, and with the falling sales go wages and employment. When it comes time to pay their business tax this year, many companies will say "regrettably", we earned no profit this year, and can pay no business tax, and were "forced to" downsize their domestic operations, or give "serious consideration" to moving operations outside Japan. More people will have less or no money, and the amount of net revenue collected will be less than when the tax was only 5%.

Its no good increase tax rates if that decreases tax revenue as it seems to do so every time. There might be a case for decreasing it to increase tax revenue.

But really the problem is spending. For every yen that makes it into the hands of builders, fishermen, farmers - people at the productive end of the pork pie, there are 2 or 3 yen taken by the bureaucracy which is fat with paper pushers whose stated lifestyle choice is to become a public servant (not called that in Japanese) in order to avoid having to work hard in the private sector.

We need Hashimoto in now to cut back on bureaucracy, as he did in Osaka, before Japan has to default.

But why are all the Japanese longing to become bureaucrats? It is not as if it is necessary going to be safe or pleasant sector of the economy when Japan goes Greek. My theory is that it relates to the overbearing power of the matriarchs, such that all children, of both sexes what to be a rent taking "manneja-"/mother/bureaucrat. Further, this is also the reason why sales tax results in a decrease in tax revenue. Since mothers, who are often low or non wage earners make the financial decisions, then taxing spending is a direct tax on the activity of these decision makers. If instead Japan taxes income and companies, then the financial decision making mothers, who don't sully themselves with income concerns, may keep spending at least until their bank balance goes down, which it won't if the economy grows and pay is increased. That is not going to work. First rule of fiscal policy - don't tax the people that control the economy. In other countries that has resulted in lower tax on the rich.

It is quite a revolution that would be needed to save Japan from sinking further into this matriarchy plus feminist quagmire.

"Why compare Japan to (Greece)"

Good question. My only answer is that he doesn't understand the concept of fiscal debt and currency systems.

"The OECD’s Tamaki said Japan’s burgeoning debt held the “risk of rising interest rates due to the unpopularity of government bonds”."

People have been warning about this for many years. Just one problem: they've always been wrong. Rates declined when they said they would rise. Time to get a new worldview, people. Pick up an econ textbook while you're at it.

This is a reckless statement by this official who has no compassion for people in the lower classes. He should talk about reducing wasteful government spending on too many politicians who do not represent the people, and on infrastructure projects building roads to the depopulated countryside or an Olympics which will bring more debt. He should instead call for a more progressive income tax to stem the growing income gap in Japan. At the very least, if the consumption tax is raised, it should not be across-the-board on all commodities and for all people equally. Necessary goods, such as basic food stuffs, should be excluded, and a higher tax could be placed on luxury brand items. There should also be refunds for people with little income.

I'll take 10% any day, if the "middle man" fees and other hidden taxes were less (like in other countries).

It’s a catch-22 circumstance for J-jovt. Posters from both sides have thoughtfully presented arguments with well supported data. Personally, I’d be inclined to next tax-hike since any other choices may simply prolong the Japan’s fiscal misery, and leave new generation in big trouble years later.

Nevertheless, If J-govt raises the tax as scheduled, It should, at the same time, exempt raw food, medicine and other daily basic necessity from the tax hike. In this way, the disadvantaged social groups on the lower economic ladder won’t suffer the devastation.

Once wages go up, things will start looking up. It's going to be a hard slog to get there, though, hopefully consumers have some incentive to get out there and spend in the meantime. Looking forward to see what happens with that pension-to-equity idea that's coming up, too, that should be interesting.

In Japan, the risks are multiplying as the welfare costs, the old people receiving state pensions, medical care, and nursing care is ballooning. Almost half of national spending is financed by issuing government debt, rather than tax revenues, meaning that half of the cost of benefits being enjoyed by today’s old people will be debt obligations that their children and grandchildren will inherit as debt that must be serviced. It is grossly unfair, even immoral, situation, though hardly unique to Japan. The consumption tax approach is one that at least places part of the burden of financing the welfare system on current recipients. Japan has a very large funding gap. Hardly anyone expects easy progress on reforming the welfare systems and reducing benefits. By the year 2050 in Japan, 40 percent of the population will be over 65. That is a heavy load on the system. They have to solve this crisis over the next two to three decades.

I will not raise taxes until the economy is restored 100 percent.

I guess it never occurs to politicians and government minions to reduce spending instead of raising taxes.

Careful you are starting to talk like a Republican/Tea Party.

Rintaro Tamaki is yet another financial illiterate in an empty suit (they breed like rabbits), getting a fat pay check to spout off on things he clearly doesn't understand and knows nothing about (and doesn't have the intellectual integrity to go find out about, as he prefers to keep his pay check coming). Or alternately he knows he is talking rubbish, but is happy to push the scaremongering propaganda (again, to keep the pay checks coming).

Bottom Line - anybody who compares Japan (a currency issuer) to Greece (a currency user), who thinks tax hikes increase tax revenue (they don't), who thinks taxes and bond sales fund the Japanese government (they don't) and who thinks monetary policy is the way to fix the problems (off the charts stupid that one) is not qualified to run a pachinko parlor, let alone advise and lecture the Japanese government. Dark Ages level of stupidity at work here.

Increasing sales tax and decreasing corporate tax is just another way for Japan to become more top heavy! The job market is saturated and would be very difficult to boost the economy through an increase of jobs.

A controversial idea would be to increase wages across the board by 10% or more the businesses would obviously want to increase the prices of products, but people would have more revenue to purchase which creates more circulation of cash.

To all those against consumption tax hikes...

I agree something needs to be done about Japanese debt, but increasing the tax rate has already been proven to not work by this last tax increase.

How has that been proven? The tax hike only took effect at the beginning of the 2nd quarter. I think it'd be prudent to see the 3rd quarter's economic results before jumping to conclusions. Also, we can't know exactly how much extra revenue will be collected each year from the consumption tax immediately after it is introduced.

Japan has way too much pork-barrel spending. One example of this can be seen by driving up in the mountains, and finding paved roads in the middle of nowhere, on roads used by almost no one. There are thousands of other examples.

I agree there is waste in government spending, but have you done the maths on these numbers to see how it squares up with the sheer scale of Japan's budget problems?

The MLIT ministry which is in charge of spending on paved roads in the middle of nowhere etc, recently requested a budget of 6.6 trillion yen for the next fiscal year. A lot of money no doubt, but that's out of total budget requests in excess of 100 trillion yen for the next fiscal year. So less than 6.6% of all spending.

Tax revenues are only around 50 trillion yen, so there is a shortfall of about 50 trillion yen (probably less now with the first consumption tax hike).

So even if we simply slashed the entire MLIT budget (including all the non-waste too), the government would still be looking at a budget deficit circa 43.4 trillion yen (and Japan's infrastructure would fall into disrepair too). I don't know - maybe you might be able to cut 3 trillion yen if you were really lucky, but this is really just fiddling around the edges.

26 trillion yen of tax revenues will also be eaten up to service the existing debt, but I think everyone would agree that can't be cut.

Then we come to the MHLW minstry in charge of social security etc, which requested the largest chunk of the spending at 31 trillion yen for the next year. This ministry is facing an aging population and therefore inevitable rises in outlays (in the absence of massive reforms).

The debt servicing costs and MHLW budget alone account for 57 trillion yen, approximately equal to tax revenues. That's before we even think about paying for roads, the police, self-defense, educating the kids, or anything else.

I would very much like to see large chunks of government waste slashed, but even if it did I still don't think it'd be enough and Japan will need to increase consumption tax to balance it's books. It's better to get on with it rather than playing financial chicken with the markets.

I do agree the government would see less objection if they were to take an axe to government spending simultaneously, including money wasted on the politicians themselves.

fxgai is conflating two separate issues - the creation of money and the effectiveness of how it is used.

And not sure why he wants to axe spending, other than the obvious explanation that he has no clue where money comes from

Rintaro Tamaki is yet another financial illiterate

He isn't a financial illiterate http://www.oecd.org/japan/rintaro-tamaki.htm

And not sure why he wants to axe spending, other than the obvious explanation that he has no clue where money comes from

If you believe the Japanese government's finances are sustainable I don't think this discussion is for you. Just trying to save everyone's time.

"If you believe the Japanese government's finances are sustainable I don't think this discussion is for you. "

Let's see some real evidence that Japan's finances are not "sustainable."

You recently had the chance to provide some: when the world's biggest financial istitutions started shifting away from buying Japan's debt, a move your ilk universally predicted would prove "unsustainable" to Japan, triggering a meltdown.

However, the unraveling never happened. And so your potential evidence went poof. Gee, I wonder why?

So basically the government spends more, gets higher salaries and gets richer... Causes debt? Who pays for it？わたし。。

Read between the lines here, folks, the OECD, is basically saying that they do not believe the Japanese economy will grow so the only real solution is to raise taxes.

The economy won't grow because no steps have been taken to spur growth. A shrinking population in an anemic economy won't be able to generate the tax revenue to make a dent in the public debt, especially when the government doesn't make any cuts in spending.

Plus, I don't know if the OECD has the interests of working people in mind. Except for Friedrich Hayek, I don't put much stock in the views of economists.

That the OECD believes the economy won't grow doesn't mean the government should just not make efforts to change that. Thirty years ago, you would've been absolutely correct: a consumption tax, combined with fiscal restraint would've gone a long to reducing the national debt.

Unfortunately, thirty years ago the government, and business were on the bubble high, and no attention was paid to the growing debt load.

The ugly reality is that the economy is shrinking. Tax increases now will only make people hold off on discretionary purchases (which the government is counting on for higher revenues).

You're right. I'm "assuming" the economy will grow if taxation on business and income is reduced. However, it makes more sense to spur inflation by increasing demand. Higher net incomes, and profits are far more likely to bring about "virtuous consumption".

The numbers bear it out. The tax hike is lowering demand, and hurting the economy. That is the ugly reality.

A weakening yen might help Japanese exporters and the economy, but the benefits might be fleeting, as other countries are competing with Japan's deflation-fighting strategies, devaluing currencies and cheapening their own exports. Probably the best opportunities are still in the U.S. The weaker yen can help by boosting profits for large corporate exporters, but main reason for optimism lies elsewhere, that Japanese companies and the government has to get serious about rewarding investors. There should be a pressures to increase dividends and other returns for shareholders. Japan's economic program needs a major structural changes. The benefits of yen weakening are not as great as they used to be.

I would very much like to see large chunks of government waste slashed, but even if it did I still don't think it'd be enough and Japan will need to increase consumption tax to balance it's books. It's better to get on with it rather than playing financial chicken with the markets.

I do agree the government would see less objection if they were to take an axe to government spending simultaneously, including money wasted on the politicians themselves.

fxgai, I agree with much of what you say, but, the question remains....What about the economy?

I agree that the Japanese government may need more revenue, but why not achieve that by growing the economy? It would take longer, but would ultimately deliver better results.

Yes, the Japanese government will get slightly higher revenues, in the short term, but the economy is certainly going to suffer. Revenues could very well go down as people save more money than they already do.

Why not increase demand by reducing the tax burden on working people, and the businesses that employ them? Certainly, people could shoulder the higher cost brought on by the tax hike if their net income is significantly higher.

How can working people with stagnant incomes engage in "virtuous consumption"?

sfjp330,

Japanese companies and the government has to get serious about rewarding investors. There should be a pressures to increase dividends and other returns for shareholders.

I actually see some progress in this respect - the JPX-Nikkei 400 index. Some companies have been making some good moves this year and share prices have been rewarded accordingly.

JeffLee,

A google for "Japan's finances unsustainable" will get you up to speed, but it seems the only evidence you would admit would be the actual coming to fruition of a financial crisis, rather than IMF, BOJ, OECD etc warnings about the risks of such. (And, I can't comment on behalf of this "ilk" which you wish to cast me in. My comments are mine and mine alone.)

JBinJapan,

I agree with you mostly too. Growth would be the ideal way forward for nations in similar circumstances, but I believe Japan's demographics will take a long time to turn around and until then will act constantly as a serious headwind to growth. So can enough growth be achieved, and soon enough, to turn Japan's finances around before it reaches a point of no return? It's like a game of chicken.

I think the answer is probably no, and therefore it's better to try to mitigate the risk of problems with government finances. The government seems to be hoping for the best, and will probably only opt to act when it's already too late. Of course, they might get lucky, but personally I'd rather not take the risk.

Yes, the Japanese government will get slightly higher revenues, in the short term, but the economy is certainly going to suffer.

I'm thinking the opposite will be the case. Economy suffers in short term, but people will get over it and we'll see 3rd quarter growth rather than further contraction.

Why not increase demand by reducing the tax burden on working people, and the businesses that employ them?

Decreasing work force suggests income tax revenues will go down as it is, some crazy stellar growth would be needed to increase revenues with lower income tax rates.

Abe to his credit has moved to reduce corporate tax which could help boost demand for labour, but lots of deregulation needs to happen too before companies make lots of taxable income.

Tax increases now will only make people hold off on discretionary purchases

People consume a lot of stuff that isn't discretionary though, and it doesn't put off everyone from making discretionary purchases. When the government increased the rate last time around, consumption tax revenues did increase.

The numbers bear it out. The tax hike is lowering demand, and hurting the economy.

True in the second quarter, but a lot of that was just paying back extra demand seen in the first quarter. I expect positive growth in the 3rd quarter personally.

It's not an entirely bad news story right now. Japanese household wealth recently hit a (nominal) record. This will possibly have a positive influence on consumption decisions.

"but it seems the only evidence you would admit would be the actual coming to fruition of a financial crisis,"

Nope, a sharp rise in interest rates, surge in inflation, angry creditors clambering for repayment, a bailout, etc. that can be traced directly to the nation's monetary or fiscal situation.

You know, the kind of thing debt hawks have been predicting for many years... but have never actually happened.

"....rather than IMF, BOJ, OECD etc warnings about the risks...."

Do you seriously consider "warnings" to be evidence?!? The straw is indeed being grasped.

Yes, I seriously do. Do you seriously consider that there is no risk that Japan's finances are unsustainable, based on a lack of initial warning signs? When the sea is calm, do you also believe there is no risk of tsunami? (Seriously?)

So can enough growth be achieved, and soon enough, to turn Japan's finances around before it reaches a point of no return? It's like a game of chicken. I think the answer is probably no, and therefore it's better to try to mitigate the risk of problems with government finances.

It would probably take a long time, but, an economic turnaround has to happen if Japan's fiscal situation is to be brought under control. The tax hike can only accomplish its stated purpose if demand goes up.

I'd agree with the sales tax increase if the government had reduced taxes on business and income, and brought in some needed spending cuts. This would help bring the debt under control.

Spending cuts, and tax reductions could happen fairly quickly. The could be enacted inside a year if the government were committed to it. Cutting business taxes further would better enable to give wage hikes to their employees. Allowing working people to keep more of their salaries bring on the "virtuous consumption" the government wants.

Unfortunately, the government isn't cutting spending or taxes on incomes and profits. In fact, it's already projected to pop 3.7 bn dollars on the 2020 Olympics alone (an extravagance, considering the state of Fukushima, and the economy).

Let's also think of the aged. Lowering the buying power of their money, and raising their living costs (needlessly) won't help them. Families caring for aged relatives will also suffer, and struggle that much harder to make ends meet.

Low economic growth means the young may go elsewhere to seek opportunities. Canada suffered a brain drain in the 90s due to high taxes on income, and business. The same could happen in Japan. Talent and capital will have a greater incentive to relocate abroad.

You might be right in that the economy wouldn't grow fast enough (at least not fast enough for OECD), but, it is far better to work toward a positive outcome than to simply live with a negative, counter-productive situation.

Hi JB,

I do think consumption tax revenues will increase as a result of the hike. I don't think demand will be hit hard enough to wipe out the revenue gains. Time will tell on this.

But to the extent that the consumption tax hike alone isn't going to be enough, I agree. Still, I think it shows the government is at least making some effort to keep things under control. The primary brokers who are obliged to bid for the government's debt have stated that if the government failed to follow through with it's stated plans on fiscal consolidation, they worry that some (particularly overseas hedge funds etc) may come in and try to "sell Japan". These primary brokers have their own money on the line with their JGB holdings so they have good reason to be concerned.

I'd agree with the sales tax increase if the government had reduced taxes on business and income, and brought in some needed spending cuts. This would help bring the debt under control.

Agree with you there, especially on the business tax, and they are going in the wrong direction on fixing the expenditure problems. The Ministry of Finance in it's budget request guidelines should have laid out an "anti-waste" message - require the budget requests to be less than those for the prior year for example. Make the bureaucrats prioritize the spending. Japan has a shrinking workforce so it's important that bureaucrats don't go off allocating those resources willy-nilly on useless projects that just end up adding more debt to the pile, instead of doing something productive.

But the Ministry of Finance allowed for even higher spending requests to be submitted and will now have to try to cut back on the proposals as the budget process moves forwards. Time will tell but I don't think they care about cutting anti-productive spending yet.

Let's also think of the aged. Lowering the buying power of their money, and raising their living costs (needlessly) won't help them.

In Japan, it's the aged hold about two thirds of all the private wealth, they are the "haves". It's the younger Japanese generation the didn't live through the boom years who are struggling to get ahead with work and to raise a family. Of course some aged will be struggling, but my personal view is that those who need help should be getting it from their rich elderly peers through some kind of wealth distribution at that level, rather than making things tougher for the youth.

The problem is the elderly being greater in number have more electoral power...

You might be right in that the economy wouldn't grow fast enough (at least not fast enough for OECD),

Or to bring the debt under control

but, it is far better to work toward a positive outcome than to simply live with a negative, counter-productive situation.

I agree that the tax hike alone isn't good enough.

It's the younger Japanese generation the didn't live through the boom years who are struggling to get ahead with work and to raise a family.

There you are spot on. That's why it's imperative to work on building the economy now. If there's no reform to the tax regime in Japan, young talented people will either suffer, or leave Japan in search of better economic opportunities.

I don't begrudge the elderly their wealth as it was earned from a lifetime of hard, often thankless, work. They have paid into the system, like everyone else.

The best way to bring the debt under control is to cut spending. No spending cuts, no debt reduction, regardless of whatever taxes are imposed.

The numbers coming in now clearly show the tax hike was poorly timed. As I posted in the article, the tax caused a serious economic downturn, that had been predicted long before the new tax came into effect.

http://www.japantoday.com/category/business/view/factory-production-household-spending-fall#comment_1856015

Less consumer spending, less profits, less tax revenue to bring the debt under control. I may have written this before, but the tax hike is 30 years too late.

Japan is a heavily taxed country as it is, if you count the various fees, levies, and taxes the government impose on homes (tax on the house and the land), automobiles (bi-annual tune-up requirements), the money-grubbing ward offices, etc.

I'm from Quebec, Canada, and it's a textbook example of how reckless taxation, and spending can bring an economy to its knees. Quebec alone charges 9% on consumption, on top of the federal 5% VAT. Yet, its debt has grown, and grown, even though it is North America's most heavily taxed population.

Consumer demand has been stomped on by the tax hike. Low consumer spending, hurts profits, which could put jobs at risk down the road. If unemployment gets worse, the government will be hard pressed to bring down the debt (if it decides to do so)

I don't believe PM Abe brought the tax in to rein in the debt (as he hasn't reined in spending). It's was done to placate the brokers with the appearance of addressing the debt; it's an empty, insincere gesture, a show, that will cost Japan dearly.