Every year, around late March to early April, cherry blossoms bloom all across Japan. They escort in a new spring and transform the economic giant’s scenery, which becomes a pretty landscape of white and pink. However, analysts worry how beautiful the economic landscape will be after the new sales tax hike is introduced tomorrow; the tax will increase from five to eight percent across the country. The domestic spike may hinder businesses that already face the threat of weaker trade partners like China.
Japanese consumers have been rushing to purchase high price items such as homes in order to avoid the 60 percent increase in sales tax; meanwhile, suppliers of those goods have definitely taken notice. “Companies are curbing production to keep inventories low because they are worried about demand after the new sales tax,” senior economist Norio Miyagawa stated. For this reason, Japan is hoping for greater demand from foreign trading partners to help. Unfortunately, China’s own economic slowdown is a concern for Tokyo.
The government has offered to help energize the economy, and Bank of Japan (BOJ) will likely inject a stimulus into the economy. Miyagawa went on to express concern that domestic businesses may not rebound quickly enough; the BOJ may have to offer more assistance than originally planned. The bank has pledged to meet an annual target of two percent inflation by early 2015. Analysts are skeptical that the inflation target will be met without further stimulus.
Amidst the cherry pink and white blooms, the yen weakened against the New Zealand dollar, and also lost against the euro, as amid hopes that Beijing step up to plate with its own stimulus programs. Japan’s major trading partner in the West, the United States, has seen its dollar strengthen against the yen. The yen’s fall should almost certainly help foreign sales blossom, as trading partners will be better able to afford its goods, and stave off threats of the “tax doom.”
The country zoomed past its regional rivals in the first half of 2013, but then slowed in the second half. Some analysts credit stimuli from “Abenomics,” for the recent growth; “Abenomics,” is named after current Prime Minister Shinzo Abe, who is considered responsible for the policies. However Morgan Stanley believes that the slump caused by the tax hike will be extended. However, a government spokesman suggested that the production drop will not be as severe as it was in 1997, when the country faced a 2.3 percent decline. Still, that year’s challenge was tempered by the strong purchasing ability of foreign trading partners. In light of China’s current situation, relying on the export safety net may be precarious.
While the country celebrates its annual Cherry Blossom, it no doubt hopes for an economic bloom in spite of the sales tax hike. It is no real surprise that analysts believe that the new tax will hit hardest in the expensive consumer goods (homes, cars) arena. However, while domestic sales may face a threat from the new tax, the real focus remains on export performance. If trading partners like China can rebound from recent contraction, the weaker yen should help Japan avoid doom that some analysts seem to fear.
Commentary by Ian Erickson