BOJ minutes - Prices to rise on output gap, inflation expectations

Note that the so called output gap is for Jan. to March, before the tax hike in April.

Here comes the runaway inflation folks. This is only the beginning. Wait another year until the next sales tax increase and prices increase by 15-20% and salaries drop. Move over Spain, Japan is coming to join you at the bottom of the heap.

And watch sales drop in Japan. The international Japanese corporations will likely weather it through exports. It will be the domestic centered businesses that will suffer. Watch for a rise in unemployment and early retirement.

In a quarterly review of its long-term projections, the central bank maintained its forecast that consumer inflation would gradually accelerate towards its 2 percent target next year.

And if it does, by pure stroke of genius they are going to have it just stop there at around 2% as well (?)

Was reading somewhere yesterday someone's prediction that the BoJ will extend it's debt monetization program for another 12 months. Sounds about right to me.

Japan's economy grew 6.1% in January. Then after the tax hike, the economy shrunk by 6.8% between April and June, thus wiping put all of its gain.

This is the biggest slump since the earthquake in 2011. Sales will increase due to seasonal spending trends, but it will be short of any of the predicted numbers.

Unfortunately, the only salaries that will increase to counteract this inflation will be employees who already live comfortably.

It seems like the Bank of Japan has become a mouth-piece for PM Abe and the LDP.. Abenomics' supporters are trying to put forth a rosy picture of the economic future. However, the numbers, and common sense, are showing the sales tax hike isn't having the positive impact that Abenomics said it would. The economy is in for some hard times. I hope Abe comes to his senses, and puts the tax back at 5% (if not lower).

JBinJapan,

the numbers, and common sense, are showing the sales tax hike isn't having the positive impact that Abenomics said it would.

No one ever said the sales tax hike would have a positive impact on the economy, the point is to try to start to plug a hole in the government's massive budget deficit before it is too late. The numbers, common sense and even the IMF all say that Japan's fiscal situation "unsustainable". To it's credit Japan's government is trying to do something about it, even if they are taking the wrong option.

The economy is in for some hard times. I hope Abe comes to his senses, and puts the tax back at 5% (if not lower).

It'll be in for hard times in any case. Too much debt has put the country in a massive hole; there's no easy ways out. Global growth coupled with major reforms in Japan could be the easiest path, but Abe doesn't seem to have the leadership to get it done on the home front.

@Silvafan: "This is the biggest slump since earthquake in 2011..." It appears that after shock (Abenomics) is greater than Original earthquake. Someone has to rescue J-economy before it is too late.

Fxgai,

No one ever said the sales tax hike would have a positive impact on the economy, the point is to try to start to plug a hole in the government's massive budget deficit before it is too late.

Japan's government has made the tax hike a pillar of its economic plan, promoting it as essential to Japan's economic recovery, and future prosperity.

The numbers, common sense and even the IMF all say that Japan's fiscal situation "unsustainable"

First, the IMF is lead, and staffed by people whose salaries aren't stagnating. I have respect for the IMF, but, it's not infallible. The numbers, common sense, and even the IMF concede that the tax hike can slowdown Japan's economic recovery.

Japan's fiscal situation is unsustainable. On that point, I am with you 100%. However, as the old saying goes, "It's the economy, stupid."" Please note, I do not think you're stupid. You have made some good points here.

The economy: that's what needs to be fixed.

To it's credit Japan's government is trying to do something about it, even if they are taking the wrong option.

It is the wrong option, and so, with respect, you're giving credit where none is due. Raising taxes is not new, innovative, or bold. It's all too common, and worse, unfair to a country where working people, with stagnant incomes, are already heavily taxed

I agree the debt situation is dire, and needs to be dealt with, but , not at the expense of the economy. A healthy, growing economy is much better able to pay its debts than once that is languishing due to anemic growth.

A healthy, growing economy is much better able to pay its debts than once that is languishing due to anemic growth.

In more normal circumstances I'd agree with you, but with Japan we are talking a government with quadrillion yen of debt, and a shrinking, aging population. Japan would need an economic miracle far in excess of it's last one to see a jump in tax revenues of a degree that could solve it's fiscal woes. I just can't see this scenario as being realistic.

So either taxes go up, spending is slashed, or a combination of both. Or lots of inflation. No one is going to like the medicine, whichever it is.

I don't have much sympathy for the Japanese populace. The democracy of Japan has allowed it's politicians for 2 decades to ruin it's future, rather than elect people with a clue. Now the chickens are coming home to roost.

I don't know that you can blame populace too much for their choice of politicians, given how good politicians are at ensuring reelection of incumbents.

And at keeping and increasing levels of spending. Government's chief problem is how to spend money, not how to collect it.

I would like to see the changes in real GDP (as opposed to nominal). Politicians usually prefer to use nominal to overstate real gains. Thanks in advance.

I don't know that you can blame populace too much for their choice of politicians, given how good politicians are at ensuring reelection of incumbents.

Well I differ. After an election the TV shows ask people on the street about what they think of the new leader. Invariably the person will say something like "ganbatte hoshii desu ne". But politicians working hard doesn't secure success. People picking good policies is what matters. So instead of this "ganbatte hoshii desu ne" nonsense it should be "I hope s/he reforms the heck out of the bureaucracy and slashes spending on X Y and Z".

I think you can go to most western countries and get a more proper answer like that, but it seems the Japanese voter still needs to learn how this system is supposed to work.

Japan would need an economic miracle far in excess of it's last one to see a jump in tax revenues of a degree that could solve it's fiscal woes. I just can't see this scenario as being realistic.

It's not realistic because there's no political, or moral will to do it. Tax hikes, printing money, and deficit spending aren't medicine: they're poison.

The sales tax hike, and the next one in October 2015, won't put a dent in the sovereign debt because taxes on income (plus land, houses, estate, health insurance, yearly auto checks, etc) haven't been reduced, nor have salaries risen very much.

Certainly, Abe's strong-arming business to raise wages is counter-productive because the sales tax hikes increase their costs. Plus, PM Abe and the LDP are proliferate spenders, so how can they even make any headway against the debt?

Taxes are already high, and excessive. The notion that the Japanese government (or most government) doesn't collect enough taxes is fallacious, to say the least. 5% is a very reasonable rate for any tax. There's no need to raise it.

I'm concerned about the debt too, but, what PM Abe is doing now should've been done 40 years ago. The horse has already run out of the barn. Fix the economy first.

Cut spending, reduce taxes on income, open the economy to free trade and foreign investment: short-term. With higher take-home pay, consumers can better engage in a "virtuous cycle" of buying goods and services. Plus, working people could better finance care for aged relatives, or private, retirement savings plans.

Cutting wasteful spending leave more money for debt reduction, and funding essential services. Cuts are hard, but, intensive and thorough audits can be done to find inefficiencies (and corruption, if any). Ending corporate welfare would be a good place to start.

Long term: foster Japan's tiny, but innovative, entrepreneurial class. Japan's education system, and its entrenched business establishment tend to discourage risk-taking, self-employment, and entrepreneurial ventures.

Talented people languish in jobs with stagnant incomes, while they could just as easily be making more money from their hard work. Now, an entrepreneurial class isn't built overnight, but, something has to be done. The routine of getting "a job" in a "big company" is old-fashioned, and, now, less rewarding. Many companies employ contract or part-time workers who do the same amount of work for less money and less benefits.

The debt would still tick up, even with interest alone, but the economy would be in stronger place. The government can't torpedo the economy, then pay down the debt. People, and businesses need to make more money that the government then could tax (at reasonable and fair rates).

Abenomics is going backwards by trying to get more revenue out of a workforce with stagnant, heavily taxed, incomes; from an economy that hasn't really recovered. All the while, printing, and spending money it doesn't have.

I don't see that as realistic.

JB,

There's not much I disagree with you on, but even a great economy won't be enough to address the debt problem, and I don't see how Japan can get a great economy without addressing the debt problem in the first place.

As for sales tax. Unfortunately, Japan's rate compares lowly with most of the rest of the OECD, so it's the obvious place to start looking for revenues as it puts on the pretence of trying to fill the gap. It's also a stable source of tax revenues that doesn't fluctuate much due to economic situations. In Japan's case at the 5% rate the tax was consistently bringing in around 10 trillion in revenue a year. This is important, because realistically there will be ups and downs in the economy, and if the government were reliant on taxes that fluctuated with the times it would have even worse probability of being able to fix the debt problem in future.

Of course it'd be better if the government weren't needing to suck up so much money for it's redistribution in the first place.

Japan could really do with a big bang of reforms, but realistically it's not going to get it unless the markets demand that the debt problem be addressed. Abe has shown that he's able to talk but unable to deal it out to the bureaucracy.

"....and I don't see how Japan can get a great economy without addressing the debt problem in the first place."

Higher GDP growth is the answer. But the tax hike scuppered that one.

Anyway, why don't you cite proof or evidence on how Japan's fiscal debt is causing a drag on the economy?

Rienhart and Rogoff tried to come up with proof, but they failed because they used false data.

You figured out that the tax hike could hit consumption and therefore growth in the short term, so what do you think the debt does for the Japanese consumer's confidence in the future?

Keep in mind that the average Japanese does not believe in the fantasy that Japan's government can keep flushing money down the drain forever.

I don't see how Japan can get a great economy without addressing the debt problem in the first place.

I'm the opposite, I don't see how Japan can address the debt problem without getting a great economy. You mentioned that the government needs to up its revenue.

Government revenue comes from the economy, from the salaries of working people, and the profits of business. If these things do not improve, the sales tax won't deliver the pay-off needed to make a dent in the public debt.

Also, you're working on the false assumption that the Japanese government doesn't tax people enough. The amount of revenue collected by the ward offices alone is gargantuan.

Also, by ignoring the economy, the Japanese government is selling out the future of Japan's youth. The young people of Japan are looking at lifetime of part-time work, stagnant salaries, and higher taxes.

Keep in mind that the average Japanese does not believe in the fantasy that Japan's government can keep flushing money down the drain forever.

With no real spending cuts, or waste reduction, the Japanese government will continue sending cash down the toilet. Proponents of the tax hike overlook this very important flaw in their reasoning. The public debt is the result of government spending money it doesn't have: if there's no change to its profligate ways, the government will run up deficits every year.

so what do you think the debt does for the Japanese consumer's confidence in the future?

You're right. The debt isn't good for consumer confidence. However, nothing crushes consumer confidence like higher taxes on goods and services (many expensive before the tax hike). Stagnant salaries, higher living costs, and rapacious taxation won't prompt people to spend more money.

The interest alone will drive up the debt. Without a plan to get the economy back to prosperity (and spending cuts), the debt will continue its exponential growth.

I'm the opposite, I don't see how Japan can address the debt problem without getting a great economy. You mentioned that the government needs to up its revenue.

Absolutely. But take a look at Japan's historical tax revenue figures, and compare with today's fiscal deficit. The boost to tax revenues from a good economy won't do the trick, and realistically Japan won't be able to sustainably acheive better economic performance than was seen during the bubble times.

I'm not saying Abe shouldn't try to boost the economy, I absolutely think he should. But I just think even if they were realistically successful, Japan would still have major fiscal troubles and something else needs to be done.

Government revenue comes from the economy, from the salaries of working people, and the profits of business. If these things do not improve, the sales tax won't deliver the pay-off needed to make a dent in the public debt.

Yes but at least it's a start to addressing the problem, rather than throwing caution to the wind and hoping the market doesn't deal to their fiscal imprudence.

Also, you're working on the false assumption that the Japanese government doesn't tax people enough. The amount of revenue collected by the ward offices alone is gargantuan.

Actually I am a low tax, small government kind of guy. But in Japan's case, I think they've just blown it too badly with years of out of control spending. I'd prefer they reformed government spending rather than raised consumption tax, but I still think both options are better than doing nothing, as the fiscal problem would only get worse faster otherwise.

However, nothing crushes consumer confidence like higher taxes on goods and services (many expensive before the tax hike).

Maybe I'm different but I figure the consumption tax costs me an extra 50,000 yen a year, I am dealing with this. What worries me more is how my future looks in a country where the government is broke.

Without a plan to get the economy back to prosperity (and spending cuts), the debt will continue its exponential growth.

We are generally in agreement, but just differ on the sequencing and perhaps the magnitude of the debt problem.