Abe’s tax hike plan helped by strong growth

ROBUST growth for Japan between April and June has been revised further, up from 0.6 per cent to 0.9 per cent, following the country’s programme of radical monetary easing.

Coming swiftly after the announcement that Tokyo will host the summer Olympic games in 2020, the Nikkei index reacted well yesterday, rising by 2.48 per cent over the day.

The revision will be good news for Prime Minister Shinzo Abe, who needs strong economic data to reinforce his plans for a hike in Japan’s consumption tax this April.

The sales tax is currently five per cent, which Abe hopes to raise to eight per cent in the spring, and on to 10 per cent in 2015. The government has struggled to gain widespread support for the change, with lingering memories of a 1997 sales tax hike that is blamed for stalling the economy.

According to indicators released by the Organisation for Economic Co-operation and Development (OECD) yesterday, Japan’s growth is currently above trend, and adds to stronger

patterns of growth in the world’s advanced economies, while other Asian markets suffer.

Abe’s plan for the Japanese economy is based on a policy programme referred to as having three arrows: aggressive monetary loosening and fiscal flexibility in the short term, followed by structural reforms to the labour market in the long term.

Berenberg’s Robert Wood poured some cold water over the positive improvement to growth figures: “The big test is how straight and true his third arrow of structural reform flies. The signs so far have been disappointing, raising the risks that this spurt of growth in Japan will fizzle out after a year or two.”

He added: “Abe has the opportunity to announce root and branch reforms that would increase competition in parts of Japan’s closeted economy and unleash better productivity growth. He just needs to seize the opportunity as he did with the stimulus.”