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HOME NRI JOURNAL Takahide Kiuchi's View - Insight into World Economic Trends :
The Impact of the Approaching Consumption Tax Hike


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Takahide Kiuchi's View - Insight into World Economic Trends :
The Impact of the Approaching Consumption Tax Hike

Takahide Kiuchi, Executive Economist, Financial Technology Solution Division

#Market Analysis

#Takahide Kiuchi

Jul. 16, 2019

The consumption tax hike scheduled for October this year is approaching. Although the negative impact of the consumption tax hike is a cause for worry amid the downturn in the domestic economy, its impact on the Japanese economy is unlikely to be significant. It is the global economy that determines the direction of the domestic economy.

Last-minute automobile purchases are sluggish

According to the June consumption trends survey released by the Cabinet Office on July 1, the Consumer Attitude Index (seasonally adjusted), which reflects consumers’ mindset, declined for nine consecutive months. The upcoming consumption tax hike in October has affected them.
Among the indicators that constitute the Consumer Attitude Index, let us look at "Timing of purchase of durable consumer goods." When the previous consumption tax hike was implemented in April 2014, this index rose markedly from the beginning of the previous year and declined rapidly at the end of the year. In the meantime, consumers would have increased their willingness to make purchases before the hike.
In a significant contrast from the previous hike, this time the index has not risen, but rather has continued to decline since the beginning of this year and hence is different from what it was before the previous tax hike. This is consistent with what a number of people have pointed out, that the last-minute purchases of durable consumer goods are sluggish.
According to the Ministry of Economy, Trade and Industry's retail sales statistics, nominal sales increased rapidly before the consumption tax hike in April 2014, compared to the sales in the same period of the previous year. For automobiles, it increased two quarters prior to the hike by 14.3% and for equipment such as household appliances, one quarter prior by 19.5%.
Currently, however, the year-on-year rate of change for the two quarters before the consumption tax hike, i.e., April to June 2019 (figures estimated from those of April-May), was +0.0% for automobiles and only +3.9% for equipment such as household appliances.

How is it different from the previous consumption tax hike?

Compared with the previous consumption tax hike, the following four factors are considered to be the reason for sluggish last-minute purchases. The first is that the increase in the consumption tax rate is 2%, which is less than the previous 3%. Secondly, there was a considerable amount of last-minute purchase of durable consumer goods before the previous consumption tax hike. This is because, at the time of the 2014 tax hike, a further 2% hike was scheduled to be implemented in 2015. Hence, consumers anticipated a total tax increase of 5%, and as a result, significantly advanced their purchases of durable consumer goods. Thirdly, in the case of automobiles, tax reductions are expected to be implemented to counter the consumption tax increase. For passenger cars registered on or after October 1, 2019, the rate for related taxes will decrease. As a result, consumers' motivation to purchase automobiles before the consumption tax hike has been diminished. The fourth reason is that people were convinced that the government would again postpone the implementation of the consumption tax hike, like the previous two times.

The negative impact of the consumption tax hike on the economy is not significant

These factors have kept down last-minute purchases. They may start to increase as the impact of the fourth factor is steadily diminishing, but nevertheless, I believe that the first three factors will continue to relatively restrain this trend.
If last-minute purchases are sluggish, the reaction to last-minute purchases will also be smaller than the previous tax hike. Furthermore, the government is implementing consumption tax measures of more than 2 trillion yen, which is exactly the same amount as the decline in real household income due to the consumption tax hike. This has the problem of cutting the fiscal soundness effects of the tax hike, but as a result, the negative impact of the consumption tax hike on the economy is likely to be offset.
From this point of view, it is unlikely that the domestic economy will deteriorate solely due to the impact of the consumption tax hike. The direction of the domestic economy is largely determined by the global economy and other overseas factors.

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