Sales Tax Increase Could Be Last Roll Of The Dice For Japan

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Sales Tax Increase Could Be Last Roll Of The Dice For Japan

Japan holds the honour of being the world’s third largest economy by GDP. It also holds the more dubious honor of having the world’s largest debt to GDP ratio. At 227% Japan is one of only two countries in the world where this ratio is over the 200% mark, Zimbabwe being the other. It is also top of the short list of only 14 countries that have public debt running at greater than 100% of GDP.

To compound Japan’s problems this debt burden is not only rising, it is rising rapidly. Estimates for the end of next year suggest that Japanese debt will reach 260% of it’s Gross Domestic Product.

Japan’s debt burden is the legacy of a two decade long deflationary spiral, one that has now turned into a debt spiral as the debt service burden leads to further borrowing in order to provide essential central services such as social welfare, education, security and defence.

The Bank of Japan’s hands are tied. Interest rates are at 0% and have been for some time, monetary stimulus programs abound but are proving to be of limited effect.

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The Japanese economy is experiencing a nominal amount of growth, GDP is expanding at about 1% per annum. Inflation however at 1.4% is totally eroding this hard earned growth.

There is very limited scope remaining for spending cuts, likewise there is no further room for income or corporate tax increases. In order to tackle the debt situation the Government has had to turn to a sales tax hike. This will take the sales tax from 5% to 8% next month and already there is talk of adding an additional 2% next year.

A sales tax increase of this magnitude will only serve to further strangle domestic activity and carries a stark risk of pushing the unemployment figures higher. This move could detrimentally affect Japan’s one saving grace, that it is enjoying a full employment scenario. The prevailing 3.7% unemployment rate eases the social welfare burden and when combined with an income tax rate of 50% it is one of the few positives enabling Japan to keep itself afloat.

To contact the reporter of this story: James Brennan at james@forexminute.com