• Home
• About/Contact
• Economic Reports
• Research
• Advertising

• Business
• Economics
• Reports
• Finance
• Marketing
• Politics
• Real Estate
• Services
• Retail
• Tech

Subscribe

Fukuda: Now is “crucial” time to act on sales tax

According to today’s Nikkei, Prime Minister Yasuo Fukuda said that now is a “crucial time to make a decision” on whether or not to raise Japan’s sales tax rates in order to finance the nation’s social security obligations while speaking to reporters from nations attending the G8 summit next month.

Fukuda pointed out that Japan has lower tax rates and an older population than many other nations in North America and Europe, and thus has run into financial trouble.

Has Fukuda managed to divert attention away from the fact that environmental issues are fading from the G8 agenda?

The silver lining on the recent Nikkei downturn? Japan’s government eyes extending tax breaks; A sovereign wealth fund is proposed

Despite the opposition Democratic Party of Japan attempting to use gasoline, capital gains and dividend income taxes as political footballs early on in the Diet session, current economic conditions are allowing the ruling Liberal Democratic Party to usurp at least part of the DPJ’s thunder, even if doing so may hurt the nation’s tax base.

On Thursday, the Nikkei reported that a group of 58 LDP lawmakers, led by former Financial Services Minister Yuji Yamamoto, have made a proposal to extend temporary tax breaks on revenue earned from capital gains and dividends. Whether or not this will lead to compromise on the gasoline tax issue is open to speculation, but lower taxes are always a good thing in the eyes of investors.

Current tax on dividends and capital gains is set at 10 percent, though that figure is set to be eased back up to 20% by 2010. The LDP’s proposal would put off any scheduled increases in the taxes so long as the Nikkei remains under 18,000 points. We don’t see the point in such an arbitrary number (it corresponds approximately with the Nikkei’s high from last year), but this is more about politics than the economy.

Perhaps more interestingly, however, is that this proposal also calls for the setting up of a sovereign wealth fund. Although the battle over taxes between the LDP and DPJ promises to provide at least some excitement in the opening months of this year’s political season, a potential showdown between the government and the Ministry of Finance (which has thus far resisted efforts to make any ‘risky’ use of Japan’s foreign reserves) might prove far, far more entertaining.

Would it be possible that we see the sovereign wealth fund arm of the proposal dropped in exchange for extending the tax breaks?

Japan headed for a ‘mild recession’ in 2008: Morgan Stanley

In a piece published yesterday at the Morgan Stanley Global Economic Forum, Takehiro Sato, the firm’s chief Japan economist, announced that he forecasts “only a mild recession, with real growth of around 1% in 2008.” One month ago, Sato’s growth estimate for Japan’s economy in 2008 stood at 1.9 percent - yesterday that was cut to 0.9 percent.

At the same time, Sato acknowledges that the risk of zero growth in 2008 also exists. This scenario might result from the deadly trio of a stronger yen over a prolonged period of time, a recession or serious slowdown in the US economy, and sustained higher oil prices.

Sato’s piece blames not only high oil prices, the fallout from the subprime crisis and a strong yen for the negatively revised assessment, but also Japanese governmental policies. Stricter consumer finance laws and the bungled implementation of revisions to the Building Standards Law are both cited. Sato also asserts that the government has done a poor job discussing any possible tax increases with the public, and that this has contributed to sluggish consumer spending.

We seem to remember back in October that the Ministry of Finance hired a certain Mr Masuda away from Dentsu to serve as the Ministry’s Director of Public Relations Planning and Coordination - in other words, he was the man charged with laying out the plan to explain potential tax hikes to the public. Thus far, there has been noticeably little planning and perhaps even less coordination amongst governmental bodies on this issue. Even today, more news of government panels urging an increase in the consumption tax hit the news.

His full report (which is broken down into two sections) is a must read for anyone following the Japanese economy at this time. The part that spooked us discusses why wages are unlikely to increase in the first quarter of 2008, and concludes by saying:

…[C]onsumer sentiment is likely to worsen, which would be negative for consumer spending and could be one reason for an even more stagnant tone to the economy in Jan-Mar. Additionally, the reversal of structural reform may slow down productivity growth and worsen cost-push inflation in the longer term.

And one last excerpt, concerning interest rates:

Monetary policy will likely be gridlocked. Chances of a near-term hike are already remote, and looking ahead to the middle of next year, monetary policy could be turned into a political football with the Diet in a stalemate when the terms of the governor and deputy governors expire on March 19. The possibility of a vacuum in the BoJ’s leadership, which we originally highlighted whimsically, now looks alarmingly real.

We were also whimsical about such a situation, but not since late on the evening of July 29, when it became obvious that the Democratic Party of Japan would gain control of the upper house of parliament and be able to block the appointment of the successor to Mr Fukui. Bad news for Mr Muto.

Catch 3.0% - Japan’s Consumption Tax, GDP Growth Projections and Interest Rates Coming to a Head

In an interview with the Nikkei on Wednesday, Kaoru Yosano, the Chairman of the ruling Liberal Democratic Party’s Fiscal Reform Panel, stated his belief that the government should lower its projection of 3% economic growth for fiscal 2007 through 2011. What’s so important about 3%?

At that level, the government believes it would secure enough funds through current tax structures to allow it to balance the national budget and not raise the consumption tax. Over the past few years, with pension obligations growing, it has become obvious that a raise in the consumption tax would have to be discussed at some point. Currently, one third of Japan’s pension fund obligations are derived from the consumption tax.

Nonetheless, we have seen successive prime ministers twist themselves into pretzels in order to avoid discussion of a tax hike. Koizumi had the least trouble; he was able to focus public attention on postal privatization and make it such a pivotal, polarizing issue that the consumption tax issue fell briefly by the wayside. Abe fared less well, instead blatantly ignoring discussion of the issue in the leadup to the Upper House election in July of this year: “We won’t not discuss the issue of consumption taxes at the appropriate time.”

The appropriate time was then.

Ignoring the issue did not help Abe in the Upper House election, in which his LDP looked like a solid high school football team going up against the New England Patriots, except the DPJ was actually the Miami Dolphins in stolen uniforms and should never have looked so good. Given how badly a consumption tax could hurt the LDP at the polls (not to mention the - ahem - economy), would it not make sense for Prime Minister Yasuo Fukuda to call a Lower House election this Fall, before a tax hike kicks in?

It gets better. Read more

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

Shockingly few English language media pieces have touched upon the impact that increased local taxes have had in Japan since the new rates went into effect from April 1. This could be because we haven’t yet seen the effects in terms of statistical regurgitation, or it could be the distance between the English language media on Japan and the average person living and working in Japan (they don’t tend to speak a common language).

The truth is that despite widespread claims to the contrary, national income taxes will not really be reduced for most people, since the income tax cuts initiated during the Koizumi administration have been very, very quietly rolled back in two steps: one on January 1, 2006 and the second on January 1, 2007. Since New Years tends to be such a huge holiday in Japan, the National Tax Agency could hand out news releases to their press club members the day before New Years and be pretty much assured that not many people would notice the following day. And not many did.

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.

The worry is starting to set in. On July 27, the Ministry of Trade, Economy and Industry is set to release the most recent retail sales data, and on July 31, the Ministry of Internal Affairs and Communications will release household spending data. With many households nervous over future prospects, a potential rise in the consumption tax, sluggish (if negative when normalized) gains in wages and decreased consumer confidence in June, economy watchers should now be worrying whether these two reports might prove to be a nail in the coffin of an August interest rate hike by the Bank of Japan.

Read more

Copyright © 2006-2008 Japan Economy News

Disclaimer