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Asia

Abenomics' gains 'distorted' by consumption tax, say analysts

Japan's economy lost steam in the second quarter of 2014 and output contracted sharply. Analysts blame the slump largely on a national sales tax hike, but disagree over how to boost long-term growth in the Asian country.

From an annualized expansion of 5.9 percent in the first quarter of this year to a contraction of 7.1 percent in the second quarter: The Japanese economy's change of course has been striking. Figures released on Monday, September 8, showed that the Asian nation's output shrank 1.8 percent in the April-to-June period, its sharpest fall in recent years.

At the same time, the data indicated a decline of more than five percentage points in household spending as well as business investment, renewing concerns over the fate of the world's third largest economy. The main reason for the negative growth, many economists say, is the Japanese government's decision to hike consumer sales tax from 5 percent to 8 percent back in April this year.

Marcel Thieliant, expert on Japanese economy at the London-based research consultancy Capital Economics, explains that in an attempt to avoid paying a higher tax, consumers brought forward their spending to the first quarter.

As a result, sales of cars and other durable goods reached multi-year highs in the period between January and March. This surge in consumption, however, was reversed in the second quarter following the hike, thus causing demand to plummet and output to shrink, the economist added.

Japan Kabinettsumbildung Abe PK 03.09.2014

Abe unveiled the "third arrow" of his economic reform in June aimed at tackling the structural challenges

A blow to Abenomics?

The government of Shinzo Abe, however, has plans to raise the tax even further to around ten percent in 2015 and many call on Abe to delay the increase, warning that such a move could threaten the fragile recovery.

The sharp contraction has already cast a shadow over Abe's attempts to revitalize the nation's economy and the credibility of his so-called "Abenomics." While the PM's economic policies may have initially been successful, their achievements have now been distorted by the negative effects of the consumption tax. From expansion rates higher than that of the US and the UK, Japan's growth has seen such a sharp decline that it can now regarded as "mediocre," Thieliant said.

"The government is trying to stabilize public finances while, at the same time, maintain economic growth. This balance is hard to reconcile," the economist added, stressing, however, that "the policy, overall, is going in the right direction."

Furthermore, the slump comes after Abe unveiled the "third arrow" of his economic reform in June aimed at tackling the structural challenges facing the country. Still, a section of economists believes Japan has to raise taxes and cut government spending in order to overcome the daunting challenges facing the nation. For instance, Japan has one of the world's biggest debt-to-GDP ratios - more than 200 percent - as well as a rapidly ageing and shrinking population.

Highly indebted

Moreover, despite its high national debt, the country continues to run massive budget deficits. In 2013, it stood at as high as 8.4 percent of the nation's output. Naoyuki Yoshino, dean of the Asian Development Bank Institute (ADBI), told DW that the Abe administration needs to reduce fiscal deficits, increase tax rates and implement structural reforms.

The economist also stresses that the percentage of the national budget allocated for social welfare - currently 30 percent - needs to be cut back despite the country's ageing populace. Instead, the government should encourage and facilitate more elderly people to take up active employment and postpone retirement, Yoshino argues.

More women at work

Experts say one area where Abe's policies have been able to make a difference is in female labor force participation. Compared to many western countries, Japan has a lower proportion of women who take up jobs outside the household.

Abe proposed to increase this rate by making it easier for women to manage both private and professional lives. His plan foresaw an expansion of inexpensive child care facilities across the country.

Economist Thieliant says Abe has been "very successful on this front." Underlining that the proportion of Japan's working age population is shrinking by 1.5 percent a year, he said that this decline is partly being compensated by the increase in the number of women in the workforce.

Japan Frau Alter

The government should encourage more elderly people to take up active employment and postpone retirement, says Yoshino

He explains that as part of its long-term measures to boost growth, Tokyo could undertake many other measures such as offering more support to families to increase birth rates and liberalizing immigration policies.

However, Japanese economist Yoshino disagrees with the latter. The ADBI dean believes immigration is not a solution for Japan's problems as people who come from other countries will also eventually become old and retire.

For him, the solution to the country's economic problems lies in a combination of measures that will increase the percentage of old people and women in the labor force, as well as cut government spending on social welfare.