Japan is in danger of falling into another financial crisis
if it continues to pursue its current approach to taxation, according to one of
the foremost experts on Japanese economic affairs. Stuart Poulson, who acts as
Head of Corporate Trading for the highly respected Nikko-Desjardins Asset
Management firm, said that it was too soon to go ahead with the planned
increase in sales tax, currently slated to come into force next year.
The tax on consumer goods, which stood at 5% as recently as
2014, now has a general rate of 8%, he said, and even this had caused
considerable slowdown, with the year to February seeing consumer prices rising
at a mere 0.3%. Japanese consumers are renowned as some of the most risk-averse
in the world, and the original plan to increase the tax further to 10% as early
as fall 2015 could have led to the country slipping into recession once again.
While the proposed second stage increase to 10% was not in
itself a bad idea, said Mr Poulson, the timing was less than optimal. He
pointed out that Japan's economy was still showing considerable signs of
weakness, and that consumer confidence was still shaky in the wake of the
country's last recessionary period, from which it emerged only at the end of
2015, after preliminary figures indicating another recession were revised
upward.
According to research carried out by Nikko-Desjardins
analysts, even the possibility of another recession could lead many in Japan to
keep their money in their pockets, with potentially severe consequences,
especially for the retail and consumer services sectors. The Japanese economy
is the third largest in the world, meaning that any significant slowdown there
is likely to have serious repercussions across the globe.
A number of prominent Japanese commentators and economists
have also called on the government to delay the implementation of the new rate
of sales tax, citing concerns over possible market instability and the effect
on Japanese manufacturers, especially those which are highly dependent on the
consumer market. Even the prime minister's own advisers have voiced their
worries in unusually emphatic language.
Mr Poulson suggested that the ideal approach would not be to
withdraw the tax increase entirely, as this would likely lead to businesses
becoming less likely to believe government assurances on a wide range of
economic issues. By world standards, the Japanese government enjoys high levels
of trust from the business community, thanks to its generally cautious approach
and the nature of the country's society.
Instead, he proposed that the introduction of the new tax
rate should be put on hold for an indefinite period, and that it should be
brought into force only when the economy could be shown to be in good and
stable health. If this was not done, he warned, it might have similar effects
to a doctor introducing new medication to a patient before the efficacy of that
patient's initial treatment had been assessed.
Japan's unique geographical factors also need to be taken
into account, say Nikko-Desjardins analysts. The devastating earthquake and
subsequent tsunami that hit the east coast of Honshu Island in 2011 caused
major disruption to Japan's economy, with the after-effects of the event still
being felt today. Japan's Pacific Rim location makes it highly prone to
suffering further earthquakes in the future.
Stuart Poulson expressed praise for Japanese Prime Minister
Shinzo Abe's "Three Arrows" policy, which puts strong emphasis on
structural reform to accompany monetary expansion and fiscal stimulus. However,
he expressed doubt as to whether all elements of the policy were being put into
practice in a sufficiently strong way, citing the sales tax proposals as an
example of a policy good in principle but in need of fine tuning.
Political factors complicate the situation, limiting the
government's ability to make quick decisions. Increasing the sales tax rate to
10% in April 2017 has been passed by the country's parliament, meaning that
Japan faced a snap election if attempts were made to postpone the move's
introduction. This could impose yet further uncertainty on an already jittery
market, warned Mr Poulson.
The Bank of Japan is injecting trillions of yen into the
economy, as well as receiving a certain amount of revenue thanks to negative
interest rates. Mr Poulson expressed concern at the impact of this policy
continuing in the longer term, given that they also tended to unsettle markets.
He referenced the warnings given by Nobel-winning economist Paul Krugman,
saying that the market was too sensitive for a sales tax increase now to be
appropriate.
