As if it were a stone, Japan has tripped again with the rise in the consumption tax. The VAT hike from 8% to 10% last October caused a 6.3% decline in GDP in the last quarter of the year in annualized terms (-1.6% in quarterly terms), much more than expected by the analysts (-3.8%), which together with the slowdown in activity caused by the coronavirus since the beginning of the year makes it almost inevitable that the world's third economy will enter into a technical recession in this quarter.
"The fiscal increase of October 2019 will go down in history as a political error," said Jesper Koll, an adviser to Wisdom Tree. IHS Markit economist in Tokyo, Harumi Taguchi, qualifies. "Strategically, the rise in the consumption tax was not a mistake because it is a more stable way of securing income than direct taxes to cover the rising social security costs," he said in an email exchange. "That said, it was not the appropriate time given the persistent uncertainty arising from the commercial tension between the US and China, which has delayed investment, production and, thus, wage increases."
In 2014, something similar happened when the Government raised the consumption tax in April of that year from 5% to 8% and the economy contracted 6.8% in that quarter. Only the tsunami that took place in March 2011 caused a major fall in economic activity, of 6.9% in the first quarter of that year. To mitigate the impact of the tax increase, this time the Shinzo Abe Government introduced a program to reimburse consumers for purchases, tax discounts for mortgages and free childcare services. It has served little. In addition to the VAT increase, typhoons that ravaged the center and east of the country in the final stretch of the year ended up sharpening the fall.
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"This shows that, also in economics, the repetition of experiments under the same conditions usually ends up producing the same results," explains José Ramón Diez Guijarro, director of the Bankia Research Department, in a note.
In December, a seemingly positive news already anticipated the deterioration of the activity at the end of the year. "The increase in GDP in the third quarter of 1.8% - instead of the expected 0.2% - suggests that consumers took the opportunity to buy before the tax increase and hard times are approaching," Udith Sikand warned in a note , from Gavekal Research from Hong Kong. The fall in household spending and retail sales in October launched the first warning signs. So much so that the Government approved an emergency package in December with an additional budget expenditure equivalent to 5% of GDP.
Japan's economy
Quarterly variation of GDP
3%
two
one
0
-one
–1.6%
-two
2010
2012
2014
2016
2018
2020
Assets of central banks
120% of GDP
Japan
100
80
60
Zone
euro
40
twenty
USA
0
99
01
03
05
07
09
eleven
13
fifteen
17
19
Source: Trading Economics and IMF.
THE COUNTRY
Japan's economy
Quarterly variation of GDP
3%
two
one
0
-one
–1.6%
-two
2010
2012
2014
2016
2018
2020
Assets of central banks
120% of GDP
Japan
100
80
60
Zone
euro
40
twenty
USA
0
99
01
03
05
07
09
eleven
13
fifteen
17
19
Source: Trading Economics and IMF.
THE COUNTRY
Japan's economy
Quarterly variation of GDP
Assets of central banks
3%
120% of GDP
Japan
100
two
80
one
60
0
Zone
euro
40
-one
twenty
USA
–1.6%
0
-two
2010
2012
2014
2016
2018
2020
99
01
03
05
07
09
eleven
13
fifteen
17
19
Source: Trading Economics and IMF.
THE COUNTRY
No one thought, however, that the deterioration was so strong. Nor does the International Monetary Fund (IMF), which even on the 10th said that "the increase of two VAT points seems to have had less impact than the 2014 increase thanks largely to the measures taken by the Government." Reality, stubborn, denies them.
The truth is that seven years after launching its program to stimulate growth and abandon the secular stagnation of the economy, the package of measures known as the Abeconomy has not just worked. “Abeconomy could end the deflationary spiral, even if we continue to deflate, it can also support business perspectives and stimulate internal investment. But it has not promoted sufficient structural reforms to raise potential growth, ”admits Harumi Taguchi. It is also true that with a public debt of 237% GDP and the world's oldest population, the VAT increase is the recipe that most experts and international organizations recommend to Japan, despite the criticism it raises when it decides to put it in progress (1997, 2014, 2019).
“The first lesson taken from the Japanese case is that, once the agents' expectations get used to that latent state of activity, it is very difficult to get out of it. The second is that demography has played a very important role in the atony of activity, ”says Díez Guijarro.
And the third, experts agree, is that the wrong and slow reaction to the financial crisis of the 1990s is still felt about the economy. “Almost two decades later, the effectiveness of all the measures placed on the table remains very debatable. Perhaps, because the most necessary part to try to recover the potential growth is the most complicated to implement, while the degrees of freedom of the traditional demand policies are exhausted ”, the Bankia economist affects. Lessons to be taken into account especially in the face of the risk of Japaneseization of the European economy.
The Olympic Games, in the spotlight
The fact that the country that hosts the Olympic Games enters into recession begins to become a tradition. Japan is about to suffer before even the sporting celebration. The Shinzo Abe Government hoped that the Games of the next summer would culminate its plans to open up the Japanese economy and increase the spending and investment of companies and consumers and serve to spur growth. In fact, tourism had become one of the few achievements of Abeconomy. But in the prime minister's plans the coronavirus has been crossed.
Abe set a goal in 2016 to reach 40 million visitors this year (31.9 million in 2019), but in January it has already registered a notable fall in the arrival of tourists, especially from China and South Korea, as a consequence of the coronavirus. In the last month alone, the number of flights between China and Japan has been reduced by 70%. S&P launched this week the warning that if the epidemic cannot be controlled, the Tokyo Games may end up being canceled, although it is not their central stage.
