24 SEP


Macro , Topics

Japan: Can consumption resist the VAT hike?

On the eve of a new VAT-rate rise, the question on everyone’s lips is: Is growth in the fourth quarter of 2019 going to decelerate to the same extent as in 2Q 2014? At that time, the government had decided to raise the VAT rate  by 3 points (from 5, to 8, per cent). Despite steady growth in early 2014, when households preferred to frontload their pre-VAT purchases, business activity fell sharply in the second quarter (-7.3% qoq annualised) (graph 1).

However, this time around, and for several reasons, the shock should be mitigated. First of all, the increase is slightly less (2 points, from 8, to 10, per cent) and its scope has been reduced (with, for example, foodstuffs and some newspaper subscriptions exempted). Next, even if consumer confidence is, as was also the case in 2014, visibly down, there have been fewer pre-hike purchases … the aftermath is highly likely to be less disturbing, especially as the government has taken steps (amounting to 1 point of GDP, according to government estimates): a little over half will go towards cutting education and medical costs and raising the lowest pensions. The government has also planned a series of temporary measures designed to boost consumption as well as public works in the area of disaster prevention.

This kind of support is welcome. However, in an environment in which growth has already been disrupted by the Sino-US trade war, tensions with South Korea and the global slowdown, it might not be enough to prevent a growth slowdown. On average, for the year 2020, growth should hardly exceed 0%.