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Japan’s Retail Sales Down in July, Consumption Tax Hike Being Discussed Openly

Yesterday, the Ministry of Economy, Trade and Industry released statistics showing that Japan’s retail sales fell 2.2% in July 2007 compared to July of last year. We have now seen retail sales fall in Japan every month since last October, aside from the 0.1% increase we saw in May of this year. Sales at large retailers fell 3.8% year-on-year.

Once again, weather is being brought out as the culprit, as a rainy holiday weekend seemed to have dampened sales. Interesting that this seems to happen every month. In truth, it seems as though savings rates are staying high (especially amongst younger Japanese consumers), wages are not increasing (though with the mass retirement of baby boomers, this is to be somewhat expected), and effective tax hikes are behind the fall in spending.

Speaking of tax hikes. While personal income tax cuts have been quietly rolled back over the past two years and local taxes have gone through the roof for most taxpayers this year, new Health, Labour and Welfare minister Yoichi Masuzoe told reporters on Thursday that a hike from 5% to 7% in the nation’s consumption tax might be necessary:

We will endeavor to work on spending cuts but we have no choice but to ask people to pay more taxes in the future…I consider it better to raise the consumption tax and disburse much of the increased tax income on welfare programs. The people should find it more acceptable if the proposed tax increase is designed to fund nursing care services, for example.

Masuzoe is surely aware that tax funds enter the same pool and attempting to tell the public something along the lines of, “This money is being collected to be spend on this” is a big fat lie. By the way, the Defense Ministry asked for more money in its next budget, after seeing five years of budget cuts (Good timing there, as Chinese Defense Minister Cao Gangchuan just asserted on Thursday that China poses no threat to Japan).

Masuzoe made his remarks despite reports last week in the Nikkei and Forbes that the ruling Liberal Democratic Party would drop discussions of a possible hike in the consumption tax, since the opposition Democratic Party of Japan, which now controls the Upper House, stands firmly opposed to such a move.

Of course, if official party line is that discussion of tax hikes is to be dropped, Masuzoe is exactly the man to bring it up, as he has been one of the most outspoken critics of the Abe administration and its policies.

However, we now see new Finance Minister Fukushiro Nukaga also saying that it would be good to discuss raising the consumption tax.

Aside from the obvious political question of why Abe cannot get his party to put forth a unified front, we have the serious economic repercussions that not only an actual tax hike might bring, but also what might result simply from further (aimless) discussion of one.

Many analysts say that an imminent consumption tax hike might cause a short-term boom in spending on durable goods and housing starts, as people try to spend before prices rise (not to mention interest rates). This is probably true. At the same time, however, when we look back at what happened in April 1997, when the consumption tax was increased from 3% to the current 5%, it seems more likely that the public mood will sour at the move, and the retail sales will stand little to no chance of picking up any time in the next three years.

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