For many years, the Japanese economy has been blighted by deflation where the price of goods falls over time. Knowing this, the population delays major purchases for as long as possible, in the knowledge that the goods will be cheaper when eventually they are bought. Whilst to many a cash-strapped citizen, this sounds like Utopia, the downside is that it causes weak domestic demand which puts pressure on jobs and partially starves the economy of investment. Politicians in Japan blame deflation for nearly two decades of economic stagnation which has seen the country rack-up the world’s largest debt to GDP ratio of 226% (over $9 trillion).
Japan has an aging population and, consequently, rising social security costs. The government needs to boost its revenues and so will be implementing an increase in sales tax in April. The sales tax is due to rise from 5% to 8% (UK standard rate VAT, a sales tax, stands at 20% , by comparison) and the impending hike has led to an increase in consumer spending and greater domestic production, to meet the expected demand. Japan has low unemployment in comparison with competitors in the USA and Eurozone economies, standing at 3.7% compared to approximately 6.5 and 12% respectively (Eurozone). Japanese unemployment is at a six-year low.
Retail sales were up by a relatively healthy 4.4% in January over their level a year earlier. The stronger January figure was the sixth consecutive rise in consumer spending. The industrial production figure was up for a second month, rising by 4% in January.
The impending sales tax increase has pushed up demand for durable goods, vehicles higher cost consumer items and houses as consumers race to beat the April deadline.