Japan may delay another hike in the sales tax

Prime Minister Abe has provided another hint that Tokyo may delay a hike in the sales tax. In an interview with the Financial Times, the PM stated that Japan has the opportunity to end deflation and this cannot be ignored. Although, he admitted that Japan must also look to the next generation.

Abe stated that “by increasing the consumption tax rate if the economy derails and if it decelerates, there will be no increase in tax revenues so it would render the whole exercise meaningless.” This shows how much rides on the strength of the economy in the third quarter. The final data is out in early December and that’s when the PM is expected to finalise his decision on the sales tax.

Early Q3 indicators aren’t good

However, early indicators suggest that Japan’s economic recovery hasn’t been going entirely to plan. While Abenomics has made some headway in regards to spurring economic growth and inflation, it hasn’t been the huge success that Tokyo was hoping it would be. Admittedly, this is partially due to aspects which are outside of Japan’s control, like softening global demand and heightened geopolitical tension.

Nonetheless, recent economic data suggest that Japan’s recovery may have stalled. Consumer price growth remains stagnant around a real underlying rate of 1% and there is a persistent lack of activity at the ground level in Japan. In other words, consumers remain nervous, thus they are cautious about spending more which is limiting inflation.

Wage growth is a bright spot

The only real bright spot at the moment are some possible indications that wage growth may be picking up. Labour cash earnings rose a revised 0.9% y/y in August, after rising an impressive 2.4% y/y in July. The persistence lack of wage growth in Japan has arguably been one of the biggest restrictions holding back domestic demand, thus a significant pick up in wages could go a long way to help the economy recover later this year.