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Japanese Economy Shrugs Off Sales Tax Hike

by Mary Swire,, Hong Kong

29 April 2014

After the three percent consumption tax hike on April 1, the Japanese Government is confident that the economy is continuing to recover and inflation is being contained.

Japan's consumption tax rate rose to eight percent, from five percent, on April 1, 2014 – the first such increase to the nation's sales tax rate since 1997, with a further hike to 10 percent planned for November next year.

There have been fears that the increased rate would stymie domestic consumption, and cause a repeat of the deep recession prompted by the last 1997 increase to the rate from three percent to five percent. The Government, however, put its hopes on a substantial JPY5 trillion (USD48.7bn) fiscal stimulus, favoring both consumers and business investment, to keep the Japanese economy growing. The Government plans to announce further expansionary measures both this year and next.

The Ministry of Finance has recently reported that economic trends appear to point to a continued recovery. While there has been a drop in consumer demand, particularly for large, more expensive items (following a huge rise in retail sales in March before the tax rise), it has been seen that demand for essential family products remains strong, as does export demand for Japanese goods.

Therefore, it is expected that there will be significant gross domestic product growth reported for the first quarter of this year, which will offset a sharp reduction in the second quarter. The Bank of Japan (BoJ) has also repeated its view that, overall this year, the economy will then continue its recovery.

In addition, the BoJ has sought to assuage consumers and investors' fears that the tax rise would substantially add to inflation rates. It has forecast that price rises in 2014 will be contained within its two percent target at about 1.9 percent.

TAGS: Finance | VAT rates | tax | investment | economics | business | value added tax (VAT) | sales tax | fiscal policy | tax rates | retail | inflation | Japan | business investment

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