With the 1st October sales tax hike fast approaching, we think the government’s countermeasures will ensure consumer spending doesn’t fall off a cliff next month, as it did after the previous tax hike. But one measure in particular has been causing confusion this week. Meanwhile, we explore whether the Bank of Japan could follow the Swiss National Bank and change its “tiering” system in order to sugar-coat a future rate cut.
Sales tax hike looming
Japan’s sales tax will be raised from 8 to 10% in 11 days’ time. We expect the hit to consumer spending to be significant but less severe than after previous tax hikes. Countermeasures such as a reduced tax rate for certain items and the introduction of free childcare should soften the blow. Nevertheless, we are forecasting that the impact of the tax hike coupled with slow global growth will cause a slight contraction in GDP next year.
Some commentators were worried that July’s weak consumption data might point towards a broader deterioration in consumer sentiment. But early evidence suggests that consumer spending bounced back in August. (See Chart 1.) This will soothe concerns that consumption is too weak to weather the tax hike.
Chart 1: Consumer Spending (% y/y) |
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Sources: Refinitiv, JCB Consumption Now, Capital Economics |
Meanwhile, local media this week have been preoccupied with the complex reward points system on cashless payments designed to offset the impact of the tax hike. Commentators are concerned that the measure is too confusing for many consumers to fully grasp and thus won’t sufficiently support consumer spending.
However, the government’s budget for the points reward programme is much smaller than that for temporary tax reductions and free childcare – it will, in effect, only alleviate around 5% of the aggregate price increase from the tax hike. By contrast, we are confident that tax reductions on food and the introduction of free childcare will provide sizeable counter-boosts to consumer spending.
Not much room for more generous tiering at BoJ
There have been some suggestions this week that the Bank of Japan could follow the ECB and SNB and make changes to its tiering system to allow it to cut its short-term policy rate without leaving banks worse off. The Swiss National Bank announced yesterday that it will increase the proportion of Swiss bank reserves that are exempt from its -0.75% policy rate, paving the way for a further rate cut. (See yesterday’s and today’s Swiss Economics Updates.) But while this will bring the proportion of deposits at the SNB charged the negative rate down to around 28%, in Japan just 5% of deposits at the BoJ are currently subject to the negative rate. The upshot is that the BoJ has much less scope to make their tiering system more generous by reducing the proportion of bank reserves subject to the policy rate.
Whereas the SNB and ECB charge their policy rates on balances above a determined multiple of the minimum reserve requirement, the BoJ operates a “three-tier system” consisting of the basic balance, the add-on balance, and the policy-rate balance. Under this system, Japanese banks earn +0.1% interest on their basic balance – the value of reserves held at the Bank in 2016 – and 0% interest on the add-on balance which is the basic balance multiplied by a benchmark ratio. Another way the Bank could make its tiering system more generous would be to hike the rates it offers on either the basic or add-on balance. But this could be interpreted as monetary tightening. Thus overall, we continue to think the Bank will refrain from cutting its short-term policy rate any further this year. (See our response to yesterday’s Board meeting.)
The week ahead
Next week is a quiet one for data releases. But further progress towards a US-Japan trade deal should be made when PM Abe and President Trump meet in New York next week.
Economic Diary & Forecasts
Date | Release/Indicator/Event | Time (JST) | Previous* | Median* | CE Forecasts* |
Mon 23rd | Autumnal Equinox Day (Holiday in Japan) | – | – | – | – |
Tue 24th | Manufacturing PMI (Sep., Prov.) | 09.30 | 49.3 | – | 49.1 |
Leading Economic Index (Jul., Fin.) | 14.00 | 93.6 | – | – | |
Coincident Index (Jul., Fin.) | 14.00 | 99.8 | – | – | |
Wed 25th | PPI Services (Aug.) | 08.50 | (+0.5%) | (+0.5%) | – |
BoJ MPM Minutes (Jul.) | 08.50 | – | – | – | |
Thu 26th | Machine Tool Orders (Aug., Fin.) | 15.00 | (-37.1%) | – | – |
Fri 27th | Tokyo CPI (Sep.) | 08.30 | (+0.6%) | (+0.5%) | (+0.4%) |
Tokyo CPI Ex Fresh Food (Sep.) | 08.30 | (+0.7%) | (+0.6%) | (+0.6%) | |
Tokyo CPI Ex Fresh Food and Energy (Sep.) | 08.30 | (+0.7%) | (+0.6%) | (+0.6%) | |
Mon 30th | Retail Sales (Aug.) | ||||
Industrial Production (Aug., Prov.) | |||||
Housing Starts (Aug.) | |||||
Construction Orders (Aug.) | |||||
Tue 1st | Unemployment Rate (Aug.) | ||||
Job-To-Applicant Ratio (Aug.) | |||||
Tankan (Q3) | |||||
Manufacturing PMI (Sep., Fin.) | |||||
Wed 2nd | Monetary Base (Sep.) | ||||
Consumer Confidence (Sep.) | |||||
Thu 3rd | Services PMI (Sep., Fin.) | ||||
*m/m(y/y) unless otherwise stated; Japan is 9 hours ahead of GMT. Sources: Bloomberg, Capital Economics | |||||
%q/q(%y/y) unless stated | Latest | Q3 2019 | Q4 2019 | 2019 | 2020 | 2021 |
GDP | +0.3%(+0.8%) | +0.4%(+1.8%) | -0.5%(+0.8%) | (+1.1%) | (-0.2%) | (+1.1%) |
Private Consumption | +0.6%(+0.9%) | +0.5%(+1.5%) | -1.3%(-0.2%) | (+0.7%) | (0.0%) | (+1.4%) |
Consumer Prices | (+0.3%) | (0.2%) | (0.3%) | (+0.4%) | (+0.3%) | (+0.5%) |
Consumer Prices Excl. Tax | (+0.3%) | (0.2%) | (-0.6%) | (+0.2%) | (-0.4%) | (+0.5%) |
Unemployment Rate (%, average) | 2.2 | 2.4 | 2.4 | 2.4 | 2.6 | 2.5 |
Policy Rate (%) | -0.10 | -0.10 | -0.10 | -0.10 | -0.10 | -0.10 |
Monetary Base, end period (¥ Tr) | 516 | 515 | 520 | 520 | 530 | 540 |
10 yr JGB, end period (%) | -0.224 | -0.10 | 0.00 | 0.00 | 0.00 | 0.00 |
Nikkei 225, end period | 22,044 | 19,500 | 18,750 | 18,750 | 21,000 | 22,000 |
¥/$, end period | 108.1 | 106 | 105 | 105 | 110 | 110 |
¥/Euro, end period | 119.4 | 115.5 | 110.3 | 110.3 | 126.5 | 126.5 |
¥/£, end period | 135.3 | 130.4 | 131.3 | 131.3 | 143 | 148.5 |
Sources: Bloomberg, Thomson Reuters, Capital Economics | ||||||
Tom Learmouth, Japan Economist, +44 20 7808 4987, tom.learmouth@capitaleconomics.com