Japan´s “Freddy Krueger”: The Consumption Tax

I believe Koichi Hamada, advisor to Shinzo Abe is right:

“I’m of the view that Japan doesn’t have to see 2 percent inflation. Just 1 percent inflation is enough, as long as the economy recovers,” he said.

“For the economy to recover, you need gradual price rises. It’s nonsense to think that the price target must be met at all cost.”

Hamada also said that delaying by a year the planned first stage of a sales tax hike could be an option as a pre-emptive move to sustain the current positive momentum in the economy.

Japan plans to double the sales tax to 10 percent in two stages, with the first increase set for April 2014. But the government has said it will make a final decision on whether to go ahead after scrutinizing economic conditions this autumn.

“Bottom line, I think the government should be cautious,” Hamada said.

He expressed confidence that Kuroda would move boldly enough to keep the economy afloat despite the sales tax hike, but added: “To be safe, however, I think one idea is to delay it by a year.”

When the ‘CT’ was introduced in 1989 inflation (as should be expected) spiked. Immediately the BoJ restrained monetary policy (see the inflection in NGDP). In 1997, again, inflation spiked. Since NGDP had been flat the only way to constrain monetary policy was by lowering NGDP, effectively placing Japan in ‘deflation mode’. Later, coincident with the international crisis, it was the turn of oil prices to incite the BoJ to bring spending down.

Japan_CT

Given Japan´s history with the ‘CT’ professor Hamada wants to ‘play it safe’. He´s right.

HT: Patricia Stefani

3 thoughts on “Japan´s “Freddy Krueger”: The Consumption Tax

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