Increased tax burdens, consumer pessimism, excessively low interest rates, and the BOJ’s June Standard of Living Survey

8 Responses to “Increased tax burdens, consumer pessimism, excessively low interest rates, and the BOJ’s June Standard of Living Survey”

1. John S on July 21st, 2007 5:12 pm

   71.8% of the public expects prices to rise over the coming year.

   But they don’t tell you why? If people are expecting a hike in consumption tax, they might be counting that in as part of the price rise.

2. WG on July 23rd, 2007 3:13 pm

   Thanks for doing something on this. It’s been really hard to get any information in English at all on the local tax hike, other than what companies seem to be saying, which they seem to have been told by local tax offices, and I’m not sure how much I trust it. There must be an honest media report on this somewhere in English.

3. Edward Hugh on July 25th, 2007 10:23 pm

   Hi Ken,

   Just to say hi, and congratulate you on your fine looking bloga and site.

   I think the fiscal issue you are drawing attention to here is an important one, which the financial press seem to be ignoring. That is they don’t seem to grasp that raising taxes and trying to raise interest rates at one and the same time is a very complicated matter. In this sense Japan inc seems to be in double bind mode.

   I thought this was interesting:

   “However, people did notice when their local taxes jumped, often between 60% and 80%, in their tax bills for this fiscal year. For those of us who own businesses or those who are self-employed, the local tax office sends them out in April, and the tax rate is based upon the previous year’s earnings. Full-time company employees see the local tax deducted from their paycheck, which is why May’s pay packets opened so many eyes.”

   These increases seem to be large, and if this is general then it isn’t any wonder that confidence is plummeting, especially as the real purchasing power of wages and salaries is dropping steadily.

   I think the coming election can be important in this sense. If they aren’t careful confidence can be in for a rout.

   “But the BOJ must have noticed that 60.7% of those polled felt that interest rates were too low.”

   Well, they may well have to get used to feeling like this for some good time to come, since the deflation situation means low interest rates are more or less guaranteed. The do intend to try in August just one more 25 bp tweak, but I think until we get through the elections I think even this outcome is unclear.

4. Scott Peterson on July 26th, 2007 12:21 am

   My sense from a US perspective, is that an arcane topic such as Japan’s tax policy just doesn’t cut it at the editorial desks of US media outlets at this time. Trade issues with China, the housing/mortage collapse, the Iraq war, oil prices, the seeming free-fall that is taking place at the three US automakers are all affect the US investor much more directly.

   It is no wonder that domestic GDP in Japan is weak, given the factors you listed above. I can understand the poll results showing that the public thinks interest rates are too low. The BoJ’s interest rate policy at this time is to ensure that exports are not damaged by yen strength, particularly due to an unwinding of the carry trade. Significant rate hikes by the BoJ would almost certainly spark an unwinding of said carry trade, jacking up the yen and damaging the profitability of the country’s export sector (which is the only thing holding Japan’s GDP in positive territory). This is a continuation of Japan’s long-standing policy of short-changing its domestic markets to benefit the export sector.

   The Japanese public would obviously like to see interest rates higher so that they can realize better returns on their savings without exposing themselves to exchange rate risk. However, as various news reports indicate, the public is starting to engage in the carry trade themselves, as they likely don’t see the BoJ’s interest rate policy changing anytime soon.

   Japan is in an economic trap at this time; any major changes in policy will cause extreme volatility for the public, business, and the government. The current policy of not making any significant changes may provide short-term stability, but eventually difficult changes will occur.

5. Ken Worsley on July 26th, 2007 1:58 am

   Scott, Thanks for your comment. As far as the media goes, I wasn’t clear about what I meant. Sorry about that. I realize that Western media outlets don’t really care about Japan’s income/local taxes because it isn’t interesting to readers. I could see the Economist or the Financial Times picking up on it in a passing mention, but that’s about it…

   I meant to say, “Japan-based English language media.” I meant the Japan Times, Daily Yomiuri, Asahi, Kyodo, Nikkei’s English online version, or even magazines such as Time Asia, Metropolis, JapanZine or J@pan Inc (though I don’t know if something might come up in their next issue).

   These Japan-based English media outlets usually pick up on this stuff, since it effects the lives of ex-pats living and working in Japan, and I’ve been surprised to not see anything in the Japan Times, in particular. Maybe someone has seen something that I’ve missed.

   Significant rate hikes by the BoJ would almost certainly spark an unwinding of said carry trade, jacking up the yen and damaging the profitability of the country’s export sector (which is the only thing holding Japan’s GDP in positive territory).

   Right…but a bit of devil’s advocate: 1) Panic selling in the case of the carry trade unwinding is a great profit opportunity for those in a position to buy dollars temporarily. As you mention, the public is ‘carry trading’ themselves. By the time a trend trickles down to Joe Six Pack (or Tanaka Six Pack), that usually means it’s getting near the end.

   2) Capital spending is also helping GDP stay in the positive, though I don’t believe a single projection I’ve read for future figures.

   3) A stronger yen could benefit those who import raw materials, to some degree.

   The domestic market, though it makes up about 55% of GDP, is shrinking and dying. 20% is over the age of 60 and a big chunk of their wealth stands to be lost in inheritance taxes, which are ludicrously high. With the birth rate chronically low, the population started to decline in 2005, and the only answer for many Japanese firms, should survival be on their radar, is to start exporting more and more.

6. Contrarian on July 26th, 2007 8:22 am

   The only solution to the chronic birth rate would involve me, a dimly lit room, and a great alibi for Japanese wives.

   On a serious note, I wonder if immigrationi reform might be a nice solution. Despite what the rednecks say, immigrants are the lifeblood of the United States. Japan could get a nice boost from immigration (albeit, they would probably have to overcome that ethnocentrism that I believe is actually slightly worse than that of Americans).

7. Ken Worsley on July 26th, 2007 2:18 pm

   Contrarian, Isn’t it telling that pensions, the birth rate, and the size of the workforce are such large issues coming into this election and yet not a single major party has a stance on immigration policy? I’m not talking about a plan for immigration reform - I mean that not a single party even mentions it as a part of policy.

   Immigration, at least on a scale greater than now, and in a form that would allow immigrants a true chance at integrating and succeeding in Japanese society, is not in the works for the next decade.

8. Edward Hugh on July 29th, 2007 3:38 pm

   Hello again Ken,

   First off thanks for the recent coverage. I look forward to an ongoing conversation between JEW and JEN.

   On the immigration topic, I completely agree with your observation. Japan does very much need immigration. At the same time I can’t help feeling that they have left all of this very late.

   If we look at global trends, we need to think about two classes of migrants. Skilled (and well educated) and unskilled.

   Now my guess is that the global economy may face severe shortages of the former group five to ten years from now, indeed the first signs of this are already with us. Such shortages will undoubtedly drive up the so-called skill premium, and will both constrain inflation-oriented central bankers and make it more difficult for countries like Japan who don’t have immigrant-friendly reputations to attract even the sort of people they probably accept they want.

   But even when it comes to unskilled migrants the position is far from clear. If we divide the major economies between those where domestic consumption and housing activity are important drivers of growth and the rest for a moment, it is clear that the former need to attract migrants at an extraordinarily fast rate. If we think in terms of the major blocs, Russia, the US, Western Europe, Eastern and Central Europe, each of these seem to be consuming anywhere between one and two million people per annum at the moment, depending on your estimates. These numbers are very large. The UK and Spain - to name two not particularly large countries - have each been accepting about 500,000 people per annum recently. So, ultimately, where will all the people come from?

   Assuming that India and China are soon to become migration neutral given their own rapid economic growth rates, and that several Latin American countries are now taking-off and will cease to be permanent providers (at least of unskilled migrants, skilled migrants are another issue) then we will need to start asking ourselves where all the people are going to come from.

   At the moment this idea - that migrants may become a scarce resource - probably seems absurd, but if we look at the “de-coupling phenomenon”, and the very fast rates of global growth, it isn’t inconceivable that at some point in the not too distant future it won’t seem so absurd.

   I also agree with you that Japan’s entry into India is interesting and significant.

   Best wishes,

   Edward

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