Japan hikes sales tax, risks stalling the economy

By Francisco Miñana

Date: Wednesday 27 Jun 2012

Japanese parliament has approved a bill to raise sales tax dramatically in an effort to increase the government's tax revenue in order to control the public debt burden and meet costs related to the earthquake reconstruction and social programmes.

The country's sales tax current stands at 5% but will be raised to 8% in 2014 and 10% in 2015. The vote has created a rift within the governing party and raises doubts about Prime Minister (PM) Yoshihiko Noda keeping his job.

The sales tax hike could stall the Japanese economy by hurting consumption. According to UBS and Itochu economists, the country's economic recovery since last year's earthquake could come to a halt in 2014, when the first tax increase goes into effect.

Economists fear that the tax increase will have the same negative effects as in 1997, when a tax increase led to a 20-month recession that cost former PM Ryutaro Hashimoto his job.

According to the Cabinet Office’s Economic and Social Research Institute, a 1% sales tax increase would cut the real gross domestic product by 0.32% one year later, Bloomberg reports.

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