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Japan raises sales tax in bid to stabilize government finances

TOKYO -- Japan raised its sales tax Tuesday, moving to stabilize government finances but at the risk of undermining a shaky economic recovery.

It's a gamble the world's No. 3 economy must take, given its soaring public debt.

Economists expect the sales tax hike, to 8 percent from 5 percent, to slow but not derail the recovery. It is the first such increase since 1997, when the combination of the tax hike, an unwinding of debt from Japan's bubble economy days and the impact of a regional financial crisis plunged the country into recession.

But recent data suggest the recovery may be less solid than Prime Minister Shinzo Abe had hoped for when he agreed to raise the tax last fall.

A quarterly central bank survey of Japan's major manufacturers released Tuesday, the “tankan,” showed business confidence rose slightly, but was well below forecasts. The outlook for coming months was less rosy, with many companies worried over a consumer backlash following the tax hike.

The 'Abenomics' economic strategy aims to spur inflation and pull Japan out of its two-decade economic slump by getting consumers and businesses to make purchases sooner rather than later. But so far wages have not risen, and the rising cost of living seems to be triggering still more belt-tightening.

Abe has promised 5 trillion yen (US$48 billion) in fresh stimulus for the economy, and still more if the tax hike proves a harsher blow than the government expects. In theory, rising consumer demand should help push wages higher, especially given the shrinking of Japan's labor force as its population falls and ages. But while some major manufacturers have raised wages slightly, employers overall have instead increased overtime work and hiring of part-time workers.

“Japan's consumers continue to face severe headwinds as strong employment gains remain insufficient to compensate for falling real wages,” Marcel Thieliant of Capital Economics said in a report Tuesday.

While some better-off Japanese have splashed out on luxury goods and vehicles, most consumers remain wary.

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A woman shops at the Itoyokado supermarket in Tokyo on Tuesday, April 1. Prices rose across Japan on Tuesday as a controversial sales tax rise came into effect, with everything from beer to washing machines costing more, sparking fears that a drop in consumer spending will derail a nascent economic recovery. (AFP)

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