The Japanese government has made some progress in its efforts to generate additional tax revenue. The increase in the national consumption tax was finally passed. Japan urgently needs to begin addressing its runaway fiscal problem.
WSJ: - Japanese Prime Minister Yoshihiko Noda won a major victory in finally securing the passage of a hard-fought tax-increase package last week, but analysts argue that a provision in the law to consider economic conditions before implementation means the battle to achieve the tax increase isn't yet over.
The law to raise the national consumption tax to 10% from the current 5% in two stages by 2015 was passed Friday after a dramatic week of political brinkmanship that forced Mr. Noda to promise general elections "in the near term" in return for opposition support for the legislation.
Once at the full 10% rate, the tax is expected to generate an extra ¥13.5 trillion ($172 billion) annually, which could help stem the country's mounting debt pile, now at nearly ¥1 quadrillion and equal to more than 200% of annual gross domestic product.This tax increase however is by no means a done deal. The law requires the government to consider economic growth conditions before implementing the tax.
Debt vs. deficit for developed nations (source: GS)
Outside analysts and ratings agencies have stressed that a tax increase is a vital first step in repairing Japan's finances, but insist that more is necessary, including measures to boost GDP.
WSJ: - The provision in the law says the government should consider the overall economic situation before implementing the increase and calls for policies to achieve annual average economic growth of about 3% in nominal terms, or about 2% in real terms, by fiscal 2020. But these figures are a stretch for a deflation-hobbled Japan that hasn't seen such growth rates since the early 1990s.This is a no win situation. Waiting for strong growth, particularly in this environment maybe futile. And the longer Japan waits the less likely they are to achieve target economic expansion. The latest analysis from Goldman shows that Japan's rapidly aging population will soon begin to severely impede growth.
Japan's percentage of "productive" population is declining faster than that of any other major economy (also discussed here). With restrictive immigration policies and low birth rates, the "vacuum" created by the aging boomers is not filled.
|Japan's working age population % (source: GS)|
Because of this decline in productive population, Goldman predicts that Japan's capacity to grow economically will become more constrained in the next few years.
|Japan's growth forecast (source: GS)|
At no point going forward is Japan expected to grow at 2%. So when should the government implement this tax increase? Some in Japan argue it should not be implemented at all because the last increase in 1997 ended up pushing the nation into a deflationary spiral.
WSJ: - Critics have blamed the last tax increase in 1997 for wiping out the nation's fragile post-bubble economic recovery and triggering deflation, which continues to plague the economy 15 years later.It truly is a case of "catch-22". Raising taxes now risks putting the nation into another recession and is not permissible unless the government believes they can improve growth. At the same time waiting for growth that may never come (per model above) will certainly accelerate the deterioration of Japan's fiscal conditions.