Reem Aboul Hosn,  Research and Market Analyst Officer, CFI Ltd
Reem Aboul Hosn, Research and Market Analyst Officer, CFI Ltd

Will Japan’s Implemented Consumption Tax hike cause an economic slowdown?

In October, Japan witnessed a transformation of price lists as a result of the 10% consumption tax increase. After several delays, Prime Minister Shinzo Abe implemented the new tax bracket. The only way to raise funds to improve the country’s ballooning social welfare costs. 

In October, Japan witnessed a transformation of price lists as a result of the 10% consumption tax increase. After several delays, Prime Minister Shinzo Abe implemented the new tax bracket. The only way to raise funds to improve the country’s ballooning social welfare costs. 

While most goods and services were subject to a tax increase, utility bills and daily necessities, as a result a little left for disposal income to use elsewhere. The consumption tax is estimated to cost households 5.7 trillion yen ($52.8 billion). 

With social security services securing under the invasion of the country’s rapidly aging population, the new revenue generated from the hike will be used to provide free childcare and early education to children under six as a way to encourage women to return to the workforce. 

In an effort to prevent a possible spending slump, a new cash back reward system was introduced on the condition that electronic payments are used instead of cash. In Japan, cash is king and the new incentive aims to develop public and private sector electronic payment infrastructure. Some participating retail stores will offer as much as 5% worth of points based on the purchase that shoppers can redeem in the future. The incentive is expected to run until June 2020. 

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In 1997, when the consumption tax increased from 3 to 5%, Japan unexpectedly suffered a brief recession. Once again, when the consumption tax was raised from 5 to 8% in 2014, the economy was said to be heading out of deflation, which was stalled by the consumption tax hike.

Despite the Japanese economy going strong over the past few months, the future looks unpredictable due to a trade war between China and the United States pushing down Japanese business confidence. But it’s believed the economic impact will be small in part due to the Tokyo Olympic Games set for year. On another hand, a trade deal reached between United States and Japan to cuts tariffs on U.S. farm goods, Japanese machine tools and other products, is expected to boost Japan’s economy by about 0.8%. The deal is also estimated to contribute about 4 trillion yen ($36.84 billion) to Japan’s gross domestic product based on its fiscal 2018 GDP and the pact will create about 280,000 jobs in Japan.

Technically, in October, The USD/JPY pair was unable to cross the resistance of 109.00, a modest pullback on of the pair from this line amid persistent US Dollar selling. Market expectations that the Fed will cut interest rates in October kept the USD bulls on the defensive and kept the pair from moving forward.