In addition, the nation’s corporate tax rate—at 30%—is uncompetitive relative to its Asian neighbors. It incentivizes international firms to incorporate elsewhere, therein capping the level of direct corporate tax revenue that Japan can generate.
It explains why policymakers quite reasonably are looking to raise revenues through an indirect tax such as VAT. This will apply to all consumers, including retirees.
That’s not to say this approach is risk-free. To offset the impact of the hike—estimated at ¥5.2 trillion ($48 billion)—the government has pledged ¥5.5 trillion in fiscal spending.
As well as free pre-school education, it is increasing social security benefits while offering tax credits for housing and durables as well as one-off handouts. It is also proposing reward points for shoppers who use cashless payments.
But experience has shown us that implementation of offsets—be it through rebates or reward points—often disappoints. Moreover, the government’s one-for-one support package leaves little room for flexibility in the event that the impact of the hike is worse than anticipated.
The government would have only one month of post-hike data to adjust spending plans before it was required to submit its national budget to the Cabinet for approval this December.
At any rate, premier Shinzo Abe will be hopeful that government offsets, a mid-cycle rebound and Olympics-related spending will drive a quicker post-hike recovery than previously.
That could allow him to sign off his term in office with a positive legacy, a successful Games and a record as Japan’s longest serving prime minister—even if he will have fallen short on his projected targets for inflation and economic revitalization.
Attractive opportunities But while cyclical issues such as trade disputes and tax hikes cause short-term disruption and volatility, they also present patient investors with more attractive stock valuations.
If we anticipate that consumer stocks will take a hit if the economy contracts in the fourth quarter, an Olympics-inspired boost to tourism would bode well for many of the same names.