Japan raises sales tax to 10% amid signs economy weakening

The tax hike will put an estimated additional burden on Japanese households of more than ¥2 trillion ($18 billion). (Kyodo News via AP)
Updated 01 October 2019

Japan raises sales tax to 10% amid signs economy weakening

  • Officials say ample measures taken to minimize the impact of the hike after previous tax increases
  • Sales tax increase covers most goods and services

TOKYO: Japan’s national sales tax was raised to 10 percent from 8 percent on Tuesday, amid concerns that the long-delayed move could derail the fragile growth path of the world’s third largest economy.
Officials said ample measures were taken to minimize the impact of the hike after previous tax increases — a 2-point increase to 5 percent in 1997 and another to 8 percent in 2014 — brought on recessions.
Prime Minister Shinzo Abe postponed this hike twice but said it was unavoidable given rising costs for elder care and a growing national debt as the population ages and shrinks. After decades of fiscal deficits that have taken the debt to more than twice the size of the economy, Abe has promised a return to balance by 2025, but that will require growth to be sustained at a healthy pace.
The sales tax hike coincided with the release of data showing business sentiment among large manufacturers worsening in September to its worst level since 2013.
The result was better than expected, but the outlook is forecast to deteriorate further by December’s quarterly report of the Bank of Japan’s survey, called the “tankan.”
“Particularly affected are producers of basic materials, reflecting recent commodity market movements, as well as producers of general-purpose and production machinery, who are exposed to risks posed by recent re-escalation of US-China trade frictions,” Oxford Economics said in a commentary.
Other data released this week have shown industrial output decreasing in August, while unemployment remained at a 26-year low of 2.2 percent.
The economy expanded at an annual pace of 1.8 percent in April-June, faster than anticipated. But slowing exports and rising prices for oil are expected to drag growth lower in coming months.
The sales tax increase covers most goods and services from clothes, electronics to transportation and medical fees, but the government has sought to soften its impact with tax breaks for home and car purchases. It also kept the tax for groceries unchanged for low-income households and is providing free pre-school education to families.
“We’ll take expeditious and utmost efforts to ward off any risk of a downward swing in the economy,” Chief Cabinet Secretary Yoshihide Suga said on the eve of the tax hike.
Analysts say the tax hike poses a deflationary risk at a time of growing uncertainty over trade tensions between the US and China.
That’s after years of ultra-loose monetary policy aimed at trying to convince businesses and consumers to spend more money. More than six years after Bank of Japan Gov. Haruhiko Kuroda launched his “big bazooka” injections of billions of dollars of cash into the economy, aimed at prying the country out of its deflationary doldrums.
“Considering the current economic conditions, the timing is bad,” said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.
He noted that the economy has slowed since late last year and that demand generated by the construction boom for the Tokyo 2020 Olympics is fading. The fear is that might undo years of efforts to escape a deflationary rut where falling prices due to slack demand depress investment, a main driver of growth.
The tax hike will put an estimated additional burden on households of more than ¥2 trillion ($18 billion).
The exceptions and incentives built into the new sales tax regime are causing confusion. For instance, purchases “to go” at Starbucks Coffee outlets are still taxed at 8 percent, while customers choosing to dine in have to pay 10 percent.
Businesses are adapting with price cuts and rewards for cashless payments to attract customers. So, economists said there was not a huge rush to beat the increase. That may mean the higher tax’s impact will be less severe than the blows of previous hikes.


Sharjah sells $1bn sukuk

Updated 03 June 2020

Sharjah sells $1bn sukuk

  • Gulf states seek to bolster finances hit by pandemic and historic slide in oil prices

DUBAI: Sharjah, the third-largest emirate of the UAE, sold $1 billion in seven-year sukuk, or Islamic bonds, on Tuesday, according to a document from one of the banks arranging the deal.

The debt sale comes as several governments in the Gulf seek to bolster their finances to face the economic fallout from the coronavirus pandemic and a historic slide in oil prices.

Sharjah set the final spread at 245 basis points (bps) over midswaps for the sukuk, which are Islamic sharia-compliant bonds, according to the document seen by Reuters.

It tightened the spread by 30 bps from where it began marketing the notes earlier on Tuesday.

Sharjah, rated Baa2 by Moody’s ratings agency and BBB by S&P, is a relatively frequent issuer of US dollar Islamic bonds.

HSBC was hired as global coordinator for the transaction. Other banks on the deal were Bank ABC, Dubai Islamic Bank, Gulf International Bank, Mashreqbank and Sharjah Islamic Bank.

In May, the emirate raised 2 billion dirhams ($545 million) in privately placed one-year sukuk to support its economy during the coronavirus pandemic, according to a statement by Bank of Sharjah, which arranged that deal.

“Issued as 12 month dirham-denominated paper in several tranches, the Sharjah Liquidity Support Mechanism (SLSM) sukuk represents the first rated short term local currency tradeable instrument in the UAE, which can be used for liquidity management by banks,” the Sharjah Finance Department said in a statement on Tuesday, confirming that deal. It said that it was a first tranche and that further tranches with one or more other banks were expected to expand the SLSM to 4 billion dirhams.

S&P Global Ratings in April revised its outlook on the emirate to negative from stable due to lower oil prices and the impact of the new coronavirus.

“Although we expect GDP growth to recover in 2021, lower-for-longer oil prices and a protracted lockdown period could pressure the emirate’s fiscal position,” the agency said.