Japan Inc backs ’17 sales tax hike to fix debt woes

26/05/2015 00:49 AST

Two-thirds of Japanese firms support the government’s plan to boost the national sales tax in 2017 and almost half believe big hikes in the future will be necessary to combat the country’s ballooning debt, a Reuters survey showed.

Sales tax hikes are particularly contentious in Japan, which has seen stagnant growth for two decades. Consumers typically spend big in the months ahead of such tax increases but then tighten purse strings for a long time afterwards.

A sales tax rise in 1997 has been blamed for helping to create a long-lasting deflationary mindset, while last year’s increase to 8% from 5% triggered a recession despite coming on the heels of bold stimulus measures.

The fallout from the last hike prompted Prime Minister Shinzo Abe to delay the next increase to 10% by 18 months to April 2017.

Japan’s public debt is, however, by far the highest in the developed world at more than twice the size of GDP, and sales tax hikes represent stable government income to pay for snowballing welfare costs as the population rapidly ages.

The Reuters Corporate Survey, conducted on May 7-19, found 67% of companies think Japan should forge ahead with the planned hike, citing potential turmoil in financial markets and a negative impact on the economy if Abe forgoes it again.

“We must not postpone over and over. That would raise the risk of a government bond sell-off,” wrote a manager at an electric machinery firm. Investors have been long concerned that failure to carry out fiscal reform could cause a rout in Japan’s government bond market, sending interest rates sharply higher.

The corporate survey, conducted for Reuters by Nikkei Research, polled 481 large and mid-sized firms which respond anonymously. Around 230 answered questions on the sales tax.

To preserve fiscal discipline, the next sales tax hike has been written into law – making it difficult to delay or undo although Abe has said he could reconsider if there was a crisis.

Considering the difficulties of changing the law, the opposition of one third of firms to the sales tax increase suggests that there is persistent unease towards the measure. The firms cited concerns about a potential blow to a fragile recovery and said it was important to ascertain the health of the economy before implementing an increase.

“The impact of the last 3 percentage point tax hike is still being felt and a new one would set an economic recovery back,” a manager at a real estate firm wrote.

But the thorny problem of how to restore fiscal discipline without derailing consumer spending in the future had firms split on whether further hikes in the sales tax were necessary.

A slim majority – 54% – thought increases to the sales tax should stop at 10% or less. But the rest believe more hikes will be needed to rein in debt, with 33% saying they thought the tax should go to about 15% in the future. Another 12% said it should go to about 20%.

By comparison, the average for national sales or value-added taxes for 33 nations within the OECD is 19%.

The survey also showed 89% of firms support the government’s goal of achieving a primary budget surplus by 2020.

But with the primary budget deficit at ¥16.4tn ($135bn) even the most optimistic of finance ministry forecasts show the government failing to meet that goal under current policies.

A primary budget is an important indicator of a country’s underlying fiscal health as it excludes income from bond sales as well as debt servicing costs.

Reuters