The Japanese economy has been battling deflation for much of the past 20 years. Whilst, at first sight, a country where prices continue to fall might appear to be a consumer’s paradise, deflation does have a negative effect on the economy. Consumers delay making significant purchases in an economy with deflation since they know that the products will be cheaper at a future date. This weakens domestic demand which is the major driver of most economies.
Since coming to power, the Japanese Prime Minister, Shinzo Abe, has made talking deflation an economic priority of his administration. The Bank of Japan (BOJ) has continued with stimulus measures and accommodative monetary policy with the aim of boosting Japan’s economy and engendering a low level of inflation. The BOJ is targeting an inflation level of 2%.
In April, a sales tax rise came into force which increased sales tax from 5% to 8%. The drive for the rise was to boost government revenues to deal (in part) with the deficit and off-set social security costs linked to Japan’s aging population. As a result of the tax increase, Japan has posted an inflation figure of 3.2% year-on-year for April: this is the steepest rise that the nation has seen in 23 years. However, the increased sales tax has, predictably, led to a decline in consumer sales for April which were 4.4% down over the same period last year – this was because consumers made purchases ahead of the tax hike. The rush to beat the tax increase saw March’s consumer sales figure come in at 11% higher than a year before – the best performance since March 1997.
Time will tell if the sales tax increase leads to a suppression of consumer demand, as some fear, or will be absorbed by consumers, helping to restore an element of inflation to the Japanese economy and boost domestic demand.