April 18, 2014 7:55 am

Initial impact of Japan sales tax rise muted

An employee holds 1-yen coins of change at a McDonald's restaurant, operated by McDonald's Holdings Co. Japan Ltd., in Tokyo, Japan, on Tuesday, April 1, 2014. While McDonald’s Japan business will raise prices of most menu items to reflect Japan's sales-tax increase, the restaurant chain will cut the price of a hamburger to 100 yen from 120 yen. Photographer: Noriyuki Aida/Bloomberg©Bloomberg

An increase in Japan’s national sales tax may be doing less damage to the economy in its initial days than some had feared, with two-thirds of companies saying in a survey that April sales were holding steady or improving compared with the same month in 2013.

The survey, conducted by Reuters and made public on Friday, is one of the first attempts to measure Japanese business conditions since the April 1 increase, which has been the focus of widespread anxiety given its potential to deter consumer spending and reverse a more than year-long economic recovery.

It will take time for more detailed data on the economy’s performance post-tax rise to emerge and there are indications that businesses remain cautious about the outlook for the coming months.

But the survey offers reassurance that the 3 percentage point rise in the value-added consumption tax may not derail efforts by Shinzo Abe, prime minister, to pull Japan out of its prolonged deflation.

“As these surveys only cover about two weeks of the post-VAT hike period, we still have to wait until May to get a better overall picture,” said Noriatsu Tanji, an analyst at Barclays Capital. “That said, it is probably fair to say at this stage that there is at least no clear evidence that the economy is doing substantially worse than expected following the VAT hike.”

Reuters asked 400 companies in a variety of industries to estimate their total April sales based on actual results from April 1-14. Of the 240 that responded, 42 per cent of manufacturers and 36 per cent of non-manufacturers said they expected sales to be roughly the same as they were in April last year.

Service-sector companies were actually more bullish in reporting sales increases, with 29 per cent seeing higher turnover in April compared with 24 per cent in the manufacturing sector.

Mr [Shinzo] Abe has helped pull Japan out of deflation with his ‘Abenomics’ programme of aggressive monetary and fiscal stimulus and although inflation has not yet reached the Bank of Japan’s target of 2 per cent, core consumer prices are now rising at a rate of more than 1 per cent year-on-year

Unsurprisingly, the retailers were the most pessimistic, with three-quarters of respondents reporting sales declines. Many consumers stockpiled daily necessities and timed purchases of big-ticket items to beat the tax increase, creating a bump in sales for many businesses before April 1 that is now inevitably giving way to a dip.

Even so, most of the retailers who reported declines said sales were down by 10 per cent or less, a level that economists characterised as modest given the pre- buying rush.

Japan’s new VAT level of 8 per cent is still much lower than in many countries, particularly in Europe, but the increase has nonetheless caused concerns. The last increase in the tax, in 1997, contributed to a deep recession that marked the beginning of Japan’s long battle with sinking prices and wages.

No equivalent survey was conducted after the previous rise, making direct comparison impossible. But other studies conducted before the latest tax increase had suggested businesses were pessimistic about the outlook. A sentiment survey taken by the Bank of Japan in March showed retailers expected a sharper decline in business conditions in the first three months after the increase than they did in 1997.

Mr Abe has helped pull Japan out of deflation with his “Abenomics” programme of aggressive monetary and fiscal stimulus and although inflation has not yet reached the Bank of Japan’s target of 2 per cent, core consumer prices are now rising at a rate of more than 1 per cent year-on-year.

The tax rise has added to the final cost of many goods and services – the amount that buyers actually fork out – but its effect on underlying price trends is less clear. Some economists think it could pull Japan back into deflation, by prompting businesses to cut their pre-tax prices in an effort to retain customers.

In the Reuters survey, a little more than half of respondents said they had raised prices to reflect the additional tax. But nearly four in 10 manufacturers and one-third of non-manufacturers said they had left their prices unchanged, in effect absorbing the tax increase themselves and accepting lower profits.

Four per cent of manufacturers and 1 per cent of non-manufacturers said they had actually lowered prices compared with March.

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