Japan’s economy will continue to grow despite challenges presented by an increase in consumption tax, according to Tomoaki Kinoshita, chief economist, Nomura, Tokyo.
The Japanese government is set to raise the tax rate from 5% to 8% in April this year.
“The biggest challenge for the Japanese economy this year is the consumption tax rate hike,” said Kinoshita.
He pointed out that the negative impact on the economy in 1997 was less down to raising consumption tax than to an internal financial crisis when financial companies failed and also external factors such as the Asian financial crisis.
“This time is very different. The economy is likely to expand rather than shrink and the government has very good stimulus package to mitigate the negative impact of a tax hike.”
There are concerns in Japan that the increase will deter consumers and therefore negatively impact corporations.
But Kinoshita said that following his recent conversations with corporation executives, they are “not really worried about it”.
“This is a good sign and corporate activity should be ok.”
However, there is concern that the government could raise consumption tax again in October 2015, this time to 10%. Prime Minister Shinzo Abe is expected to make a decision by the end of this year.
“If Q3 GDP is negative, that is not very good for the economy and Abe will probably abandon the idea of raising tax again, which would mean that reduction in corporate tax is unlikely. Unless consumption tax is raised again, it’s very difficult for the government to enact the corporate tax rate reduction.”
Kinoshita was speaking at the annual Pasla/RMA Conference on Asian Securities Lending in Tokyo on March 5.