Japan firms say Oct tax hike impact milder than 2014 increase

Japan firms say Oct tax hike impact milder than 2014 increase

TOKYO,. More than two-thirds of Japanese companies are feeling less pain from a tax increase last month than from the previous increase five years ago, which precipitated a recession, a Reuters poll found.

The results of the Reuters Corporate Survey support the view of the government and Bank of Japan that the economy looks likely to avoid a swoon in private consumption, thanks to steps taken to offset how the tax increase would affect the public.

Still, the overwhelming majority of Japanese companies remain cautious about boosting spending, with many planning to keep wages and hiring flat or even reduce them.

The survey offers the first corporate gauge of the impact of increasing the national sales tax to 10 per cent from 8 per cent, a step Prime Minister Shinzo Abe said was critical to curbing Japan’s enormous public debt. He delayed it twice for fear it would squeeze consumer spending.

More than 70 per cent of companies in the Reuters poll said both the rush to buy ahead of the October 1 increase and the subsequent pullback have been milder than when sales tax increased from 5 per cent in April 2014. That tax hike dealt a blow to private consumption, which makes up about 60 per cent of the economy.

When the economy stumbled after the 2014 increase, BOJ Governor Haruhiko Kuroda said he had underestimated the shopping spree and pullback, and subsequent declines in real income.

Although the impact this time seems smaller, that may mask underlying weakness in the world’s third-longest economy, analysts say.

“Consumers could not go on a last-minute spending spree to beat the tax hike due to sluggish wage growth,” said Kyohei Morita, chief economist Japan at Credit Agricole Securities.

The Reuters survey offers scant hope on wages, a longstanding weakness for “Abenomics,” with three-fourths of companies saying they have no plans to increase wages or add workers.

On hiring, 63 per cent said they plan to maintain current levels, while 16 per cent plan to trim their workforce; 62 per cent plan to hold the line on base pay while 4 per cent aim to reduce their wage bill.

“As the economy is in a downtrend, Japanese firms will likely refrain from hiring,” a manager at a wholesaler wrote. “Wages won’t rise unless the economy recovers.”

Some of the minority of firms planning wage increases cited Japan’s labour crunch, which has prompted companies to scramble for workers as the population ages and shrinks — even though higher wages may hurt profits.

The survey, conducted from October 24 to November 1 for Reuters by Nikkei Research, canvassed 503 big and midsize nonfinancial companies. Roughly half responded to the questions on the tax hike, hiring and pay, on condition of anonymity. — Reuters

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