Taxing times: Can higher prices, wages end deflation?

TOKYO - It's crunch time for Prime Minister Shinzo Abe and his economic policies.

Today, Japan's sales tax goes up, to 8 per cent from 5 per cent, as does a plethora of other taxes and rates. The extra expenses are certain to put a further strain on Japanese households.

The sales tax is the biggest obstacle to Mr Abe's economic policies - the so-called Abenomics - which aim to erase deflation by raising prices and wages at the same time, according to senior economist Hideo Kumano of the Dai-ichi Life Research Institute.

"But I believe Mr Abe has taken sufficient measures to ensure that the economy does not decline as a result of the tax hike," Mr Kumano said.

The three percentage point increase in sales tax - the first adjustment since 1997, when the tax went up from 3 to 5 per cent - is crucial to help clean up Japan's public finances.

The government has pledged that all the revenue collected from the latest increase will go towards funding the country's burgeoning public pension system and the rising cost of medical care.

The past weeks have seen Japanese consumers rushing to buy big-ticket items to beat the April 1 deadline.

An average Japanese family of four is expected to have to pay an extra 90,000 yen (S$1,100) a year in higher consumer taxes alone.

From today, social security costs are going up as well.

Monthly payments by workers towards the national pension fund will rise by 210 yen per person. At the same time, retirees will be getting 0.7 per cent less in pension payouts.

As the rapidly ageing population continues to push up medical costs, Japanese who turn 70 will now have to bear 20 per cent of their medical bills, up from 10 per cent.

Motorists are also being hit.

In addition to the higher sales tax, the petrol tax is going up by 0.25 yen, adding about 5 yen in all to every litre of regular petrol that motorists buy.

According to government estimates, the new tax and rate increases will add eight trillion yen in revenue to the national coffers.

The sales tax increase in 1997 led to years of deflation and economic stagnation, made worse by the Asian financial crisis.

Worried that the latest tax and rate increases could dampen consumption, leading to a repeat of the 1997 economic collapse, the government is seeking to ease the pain on consumers by providing several kinds of one-time subsidies. For instance, low-income earners will get 10,000 yen in cash and pensioners 15,000 yen.

Families with children below 15 years of age will receive 10,000 yen per child.

Low-income and middle-income home owners will also get higher income tax breaks on home loans.

But there are increasing fears that the higher taxes will doom Mr Abe's efforts to pull the economy out of the grip of longstanding deflation.

Japanese factory output data for February released on Sunday showed a decline of 2.3 per cent over the previous month, led by decreased production of large passenger cars and auto parts, suggesting that exports and domestic consumption remain weak.

One best-case scenario has it that domestic spending will fall in April and May before picking up again from June, after consumers receive their mid-year bonuses, and that the economy will be restored to pre-April levels within a year.

"Since many big companies have raised wages, their bonuses will also be much higher this year," said economic commentator and former Bank of Japan official Kenzaburo Ikeda.

"This will encourage spending by consumers."


8 per cent - Sales tax goes up from 5 per cent

20 per cent - Those who turn 70 must pay 20 per cent of their medical bills, up from 10 per cent

0.25 yen - Rise in petrol tax per litre

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