Japan’s GDP shrinks dramatically after a tax rise and a typhoon

Feb 18, 2020

ECONOMISTS STILL argue about the merits of Abenomics, the experimental mix of policies introduced by Japan’s prime minister, Abe Shinzo, seven years ago, in an effort to chase away deflation and stagnation. But two lessons are beyond debate. Japan’s bond market is remarkably docile despite the government’s towering debt. Japanese households, however, are painfully sensitive to increases in the consumption tax, a broad value-added tax imposed on most of their purchases. After the government raised the tax from 8% to 10% on October 1st, the economy shrank at an annual pace of 6.3% in the fourth quarter of 2019, according to figures released on February 17th (see chart ).

The tax increase was an unforced error. The government faces no immediate need for additional revenue. Despite gross debt nearing 240% of GDP, its borrowing remains absurdly cheap. The yield on a ten-year government bond is stuck at about zero, where the country’s central bank, the Bank of Japan (BoJ), has pegged it since 2016. That peg obliges the BoJ to buy as much government debt as necessary to keep long-term interest rates low. Such determined efforts to stimulate borrowing are needed chiefly because private spending has been weak—too weak, at least, to lift inflation to the BoJ’s target of 2% from the current 0.8%. Thus the consumption-tax...

Other news

Cookies help us deliver our services. By using our services, you agree to our use of cookies.