Earlier today, we learned that
Japan’s GDP growth rate was just 2.6% in Q2, which was much weaker than the 3.6% expected by economists.
This disappointing news comes despite Japan’s extraordinary efforts to fight deflation with extraordinarily easy monetary policy.
This also comes amid talks of raising the sales tax.
“Ending deflation and raising the sales tax are achievable at the same time,” said Bank of Japan governor Haruhiko Kuroda last week. “Restoring fiscal health is absolutely necessary and important by itself, but once fiscal discipline is loosened, it’s true that that will indirectly make a negative impact on monetary measures.”
Morgan Stanley’s Hans Redeker warns that raising a tax just as the economy begins to find its legs could be a repeat of a mistake Japan made in recent history.
Weak Japan. Japan’s 3Q GDP printed at 0.6%, disappointing expectations. Soft capital expenditure data indicate that the economy has not yet developed multiplying effects to make the rebound self-sustainable. No wonder the sales tax debate has intensified this morning with opponents of the tax increase suggesting Japan is making the same mistake it made in 1997 when the introduction of a 5% sales tax drove the economy back into deflation. Markets will remain cautious on the issue. Adjusting current tax plans of a two-step tax increase (from 5% to 8% and from 8% to 10%) towards a more gradual 1% p.a. increase makes sense from a macro point of view, but the current debate raises concerns about the political will to make structural reforms.
This 1997 mistake is seen clearly in this chart from Nomura’s Richard Koo who shows that fiscal tightening actually results in higher deficits.
Business Insider Emails & Alerts
Site highlights each day to your inbox.