Japan's fiscal stimulus will mute tax hike impact

Subject

The macroeconomic outlook for Japan.

Significance

Real GDP rose 1.8% in the April-June quarter of 2019 (seasonally adjusted, annualised), supported by household consumption and company investment, which jumped 6.1%. The one negative area was trade, where import growth had a negative effect on GDP. Nevertheless, the 6.7% jump in imports after last quarter’s collapse speaks to underlying demand strength. Part of the rise in household consumption can be attributed to the scheduled October 1 increase of the national consumption tax to 10%, from 8% currently.

Impacts

• Washington’s trade war with Beijing threatens Japanese high-tech exports of parts used in China-assembled devices.
• Low unemployment rates mask considerable spare labour supply among part-time workers.
• Employers are not yet compelled to offer higher real wages or better working conditions.
• Despite offsetting fiscal stimulus, the tax rise will still shift demand from some sectors to others.
• Monetary policymakers will be heartened by fiscal stimulus, but still confront weak inflationary pressures indicated by a flat GDP deflator.