Japanese Prime minister, Shinzo Abe. Date:5th Oct 2018 in Tokyo Japan Shot during interview by the financial Times editor Lionel Barber. Credit: Tokuyuki Matsubuchi
Shinzo Abe has vowed to go ahead with a scheduled rise in consumption tax

Japan’s ruling coalition has unveiled a series of tax breaks for housing and cars that it hopes will avoid a plunge into recession when the country raises consumption tax from 8 per cent to 10 per cent next autumn.

There will be a cut of up to ¥4,500 ($40) in the annual automobile tax while apartment buyers will be able to deduct mortgage interest from their income tax bill for an extended period. The tax breaks will cost an estimated ¥167bn ($1.5bn).

The plans show how the government of prime minister Shinzo Abe hopes to avoid the type of recession experienced after a consumption tax rise in 2014. It is also planning an elaborate system of cashback points for spending at small retailers.

Mr Abe has vowed to go ahead with a scheduled rise in consumption tax aimed at reducing the budget deficit and raising funds to spend on education. But there are fears that it will particularly hurt the consumption of big-ticket items, including new cars and apartments.

Under Japan’s system, the ruling coalition’s tax plan will form part of the 2019 budget, which is set to be revealed in the coming weeks.

“The ruling party’s plans to offset a consumption tax rise to 10 per cent are obviously insufficient,” said Kenta Izumi, policy committee chair for the opposition Democratic Party for the People.

Mr Izumi said that a third-quarter contraction in the economy showed that the prime minister’s economic policies had failed. “Abenomics has now been going for six years and it has not produced the intended results,” he said.

However, most analysts think the third-quarter weakness was due to a series of natural disasters. That view was bolstered when the Bank of Japan’s Tankan index for large manufacturers held steady at +19 in the fourth quarter, compared with expectations for a decline.

The quarterly Tankan survey subtracts the percentage of companies reporting bad business conditions from those reporting good to give indices ranging from -100 to +100, where figures above zero suggest a growing economy. The index for all companies rose one point to +16 in the fourth quarter, suggesting solid growth.

The Bank of Japan relies heavily on the Tankan to track the business cycle because Japan’s statistics on consumption and output are notoriously unreliable and prone to large revisions. The survey samples almost 10,000 companies with a response rate of 99.6 per cent.

Companies raised their forecasts for sales and investment despite the risk of tariffs on exports to the US and worries about a slowdown in China.

“Upward revisions to sales [despite] softer demand could mean companies are upbeat about transferring more costs to output prices, which is good news for the Bank of Japan and suggests that policy changes are unlikely over the near term,” said Harumi Taguchi, principal economist at IHS Markit in Tokyo.

“That said, greater concern about uncertainties over global trade tensions could make companies more cautious about wage increases and investment,” she said.

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