Japan’s retailers play games with tax rise prices; Consumption tax rise comes at delicate stage in recovery

March 23, 2014 10:46 am

Japan’s retailers play games with tax rise prices

By Ben McLannahan in Tokyo

Consumption tax rise comes at delicate stage in recovery

Japan’s revival under Shinzo Abe has pushed up inflation higher than base wages, so many people are feeling poorer. Is this a good time for taxes to go up too? Not really. Which is why the government is allowing retailers to act like they haven’t.

Consider the price of a venti green-tea frappucino at Starbucks, now displayed at a tax-inclusive price of Y550 ($5.37). Under a law passed last October, retailers are allowed to show prices exclusive of tax until 2017 – as long as somewhere on the premises there is a reminder that tax is due. Starbucks is choosing April 1, the day of the consumption tax rise, to switch to the new regime, under which the frappucino drops to Y530 excluding tax (and Y572 including it). Thousands of supermarkets and chain stores will do likewise.

Starbucks says it is switching for the sake of clarity, but many are bemused. “It’s ridiculous,” says Hiroshi Yoshikawa, a Tokyo University professor leading a panel advising the government on deficit reduction. Appearing to cut prices while actually increasing them is “cheating,” he says – “almost an insult to consumers.”

The strong words are a measure of the anxiety surrounding the fiscal squeeze, which comes at a very delicate stage in Japan’s recovery. Few doubt the government needs to narrow its huge gap between spending and income, equivalent to about one-tenth of the economy. And most argue that targeting consumption – a stable 60 per cent of gross domestic product – is the best way to do it. Even at 8 per cent, rising from 5 per cent, Japan’s tax rate will be less than half the OECD average.

But there are fears that the rise will be more than Japan can handle. Some are braced for a rerun of April 1997, when consumption taxes rose from 3 per cent to 5 per cent, causing a lull that was later exacerbated by the Asian financial crisis and a series of detonations in the banking sector.

Certainly, Japan’s economy is looking stronger now than before Mr Abe became prime minister in December 2012, vowing to overturn more than a decade of mild but persistent deflation. Nominal growth has been positive for four quarters in a row and wages at bigger companies have been picking up too, thanks largely to higher bonuses and overtime payments.

But Mr Abe’s “virtuous circle” of higher prices, wages and demand is not yet firmly established.

Japan’s headline inflation rate of 1.4 per cent is in line with the US and Germany, at 1.6 per cent and 1.2 per cent respectively. But much of Japan’s inflation is in goods, rising at an annual rate of 2.2 per cent, rather than services, at 0.5 per cent – suggesting that prices are being pushed up by the yen’s loss of purchasing power, rather than pulled up by stronger demand. There is no other reason for the price of a TV, for example, to be tumbling by about 13 per cent in the US and 8 per cent in Germany, while rising by almost 4 per cent in Japan.

Wages, meanwhile, are struggling to keeping up. For employees of big companies, it has been a good Spring bargaining season, with economy minister Akira Amari saying the likes of Toyota and Hitachi have been “more accommodating than we had hoped.” But per-capita cash earnings – flat in 2013 – will not rise nationwide unless SMEs (which account for 69 per cent of all jobs) and temporary/part-time staff (36 per cent) also benefit. In aggregate, Mizuho reckons real disposable incomes are “bound to decline” in the fiscal year ahead, given the tax rise.

As in 1997, there are signs of last-minute demand to lock in lower taxes on consumer durables, implying that a post-rise dip is inevitable. One retailer of household appliances in Gunma prefecture says that sales of air conditioning units have tripled in March from a year earlier, while fridges and washing machines have doubled.

Hence the government’s offsetting fiscal spending package of Y5.5tn – more than the extra Y4.5tn it expects to collect in the next fiscal year in consumption taxes – including grants to the poorly-paid and homebuyers.

And hence the permission to play games with prices. Allowing tax-exclusive pricing for the next three years – thus covering the second stage of the tax rise, to 10 per cent, scheduled for October 2015 – should “minimise the negative effect on consumer sentiment,” according to a senior official.

If it works, it’ll be worth it.