Global Economic Woes Part 1: Japan

This is part 1 of a 3 part series about economic issues in the world’s largest economies.

Wall Street Journal Article

Recession in the world’s third-largest economy has Japanese Prime Minister Shinzo Abe readying another major economic stimulus…

Japan’s prime minister was set to announce Tuesday that he is now putting off the tax increase.

For months, government officials repeatedly offered assurances that the recovery was on track. But an increase in the sales tax in April—to 8% from 5%—hit consumers hard and contributed to the economy contracting in the second and third quarters.

The hit from the tax increase is reminiscent of 1997, when an earlier increase in the same tax contributed to a recession, forcing Japan to borrow and spend even more.

Gross domestic product data released Monday showed that the economy fell into recession in the July-September period, shrinking 1.6% on an annualized basis, following a 7.3% contraction the previous quarter.

Some economists have blamed the Bank of Japan, which introduced additional monetary easing on Oct. 31, for waiting too long to act following the economy’s contraction in the second quarter.

My opinion: Japan has slipped into another recession following a huge sales tax hike. I honestly have no idea why policymakers in Japan would allow the sale tax to increase from 5% to 8% amid such a weak economy. I can understand the concern about the deficit, however why follow through with such a large step?  A 3% tax increase on all sales, jeez!

Contractionary adjustments to an already weak economy should come in baby steps. Put your toe in the water first type of policy. A smaller, targeted tax increase would have been more appropriate — like on capital gains.  A sales tax directly affects literally every single person in the economy as everyone has to buy things. Sales taxes are typically considered “regressive” too as they disproportionately affect those with less income. Why trip up those who are already struggling in an already struggling economy?

Now, I know I’m playing Monday morning quarterback here, but my dissent is not nit-picky. Japan voted on this rate hike back in 2012. Last quarter their economy contracted 7.3%. This means they looked at the upcoming tax increase and thought “This is still a good idea. No adjustment necessary.” Huh.

So what should Japan do now? First, they need to climb out of this hole they dug themselves in. Tax cuts, quantitative easing. In addition, I think they should promote immigration in some way. They will need to broaden their work force, consumers, and tax base in order to sustain an economic upturn for any period of time. Otherwise, they will be artificially boosting the economy for far too long.

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