Measures need to be taken to boost private consumption after tax hike
The decline in private consumption and other economic activity following the April 1 consumption tax hike has apparently been greater than initially expected.
The government and the Bank of Japan must take all possible steps through their economic policies to prevent the adverse impact of the tax hike from continuing for a protracted period.
The nation’s real gross domestic product for the April-June period fell 1.7 percent from the previous quarter, marking the first decline in two quarters, according to Cabinet Office statistics released Wednesday.
The price-adjusted real GDP contracted 6.8 percent at an annualized rate in the fiscal first quarter. It was the biggest quarterly decline in the almost three years since the economy contracted markedly during January-March 2011, in the aftermath of the Great East Japan Earthquake in March that year.
Private consumption, which rose significantly in the previous quarter due to a last-minute surge in demand before the tax hike, fell 5 percent over the quarter under review. This was greater than the 3.5 percent drop posted during April-June 1997, when the consumption tax rate was raised in April that year.
Economic and Fiscal Policy Minister Akira Amari said, “The effects of the backlash that followed the pre-tax-hike surge in demand are likely to wane gradually, and the economy is expected to stage a moderate recovery in the quarters to come,” indicating his bullish projections.
Nevertheless, it is worrisome that the pickup in personal spending is weak, with department store and new automobile sales remaining sluggish even after July.
Consumers may have been tightening their purse strings not only because of the tax hike, but also due to general price increases caused by the weakened yen and the rising price of crude oil.
Guard against slowdown
As capital investment by private companies also remains weak, there appears to be no engine for boosting domestic demand. Vigilance against an economic slowdown must be reinforced.
Prime Minister Shinzo Abe is set to decide this year whether to proceed with a further increase in the consumption tax from 8 percent to 10 percent, currently slated for October 2015. He will likely need to clearly observe economic trends.
Economic measures formulated last December to ease the adverse impact of the consumption tax hike have not yielded sufficient positive effects, as there have been delays in public works projects due to labor shortages at construction sites and the soaring price of construction materials. Smooth implementation of these projects is needed.
The mismatch between employers’ needs and job seekers’ skills in the labor market must be eliminated by improving vocational training, while measures should be taken to prevent the shortage of needed manpower from having further ill effects.
It is also important for the government to steadily carry out its growth strategy, including the lowering of the effective corporate tax rate and the easing of regulations.
It is desirable to reinforce such trends, as reinvigorated corporate activity would lead to wage hikes, which in turn would stimulate personal spending.
Soaring electricity rates will also hinder economic growth. As the restart of its nuclear power plant has been delayed, Hokkaido Electric Power Co. has applied for a second round of rate hikes, involving increases of about 20 percent.
Other power companies, including Kansai Electric Power Co., have shown signs of following suit.
The Nuclear Regulation Authority should conduct its safety examinations of nuclear power plants efficiently, and those plants whose safety has been confirmed should be allowed to steadily restart.
Even though the yen has settled into a lower value, the nation’s exports have remained sluggish. We wonder if the nation’s earning power through foreign trade has weakened.
The public and private sectors must join hands to quickly boost the international competitiveness of industries and analyze structural problems with the economy, including the hollowing-out of industries.
(From The Yomiuri Shimbun, Aug. 14, 2014)