Japanese Economy Slows Down, Sales Tax increase May Be Delayed

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Japanese Economy Slows Down, Sales Tax increase May Be Delayed
Japanese Economy Slows Down, Sales Tax increase May Be Delayed

Japanese Economy Slows Down, Sales Tax increase May Be Delayed

Japan’s economy grew at 2.6% in the three months through June which is even lower than what it was expected earlier. This may force the government to delay the planned sales-tax increase to reduce public debt which has increased to 1,000 trillion yen or $10.4 trillion. This is despite the fact that Prime Minister Shinzo Abe’s aggressive policy of monetary-easing and government spending to lift the economy out of decade-long deflation was expected to do well.

Though many economists accept that the figure represents continued solid growth in the world’s third-largest economy, capital expenditure unexpectedly fell for a sixth straight quarter which is a major concern as it signifies that companies are yet to boost spending. A lot of expectations with respect to boost in consequence of Japanese government efforts are not becoming true.

Earlier, Japanese Prime Minister Shinzo Abe had pushed an aggressive policy of monetary easing and government spending so that the national economy is taken away from deflation; however, the recent figures do not fall on the right track. This will definitely have its impact on the policy makers who are expected to decide on the sales tax increase.

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Increase in Sales Tax Rate, Economists Divided

There are efforts to curb the national debt which is about double the size of its GDP and for it the major suggestion has come to raise sales tax rate to 8 percent next April and then to 10 percent in October 2015. However, there are skeptics who consider that if sales tax is hiked the national economy may not recover from the 15 years of deflation.

Support comes from Koichi Hamada, a key adviser to Abe and a professor emeritus at Yale University, says that there is no need to raise the sales tax in a hurry. According to him, one idea that can help the government is to delay everything by one year as he feels that raising the sales tax as scheduled might hurt the economy.

However, some other economists do not concur with Koichi Hamada as they consider that growth above 2 percent is still better and the government may go to increase sales tax, as for them delay would not serve the purpose. They also suggest that sales tax should not be delayed. Even Bank of Japan Governor Haruhiko Kuroda admits that the tax hikes are needed and would not hurt the economy.

To contact the reporter of this story: Jonathan Millet at john@forexminute.com