Japanese firms want tax hike to proceed, but urge more stimulus to soften economic blow

[TOKYO] More than 60 per cent of Japanese companies want authorities to go ahead with a sales tax hike in October, but feel that additional government spending is needed to cushion the blow on the economy, a Reuters monthly poll showed.

Speculation lingers that Japan will once again delay raising the tax to 10 per cent from 8 per cent, even though Prime Minister Shinzo Abe has repeatedly said he will proceed with the increase unless there's a major economic shock.

Mr Abe has twice postponed the planned tax hike - needed to meet rising social welfare costs as the population ages - since the last increase to 8 per cent from 5 per cent in April 2014 hit consumer spending and triggered an economic slump.

To avoid a repeat of that, Mr Abe's government has earmarked 2 trillion yen (S$24.2 billion) in various spending measures to try to temper any economic downturn.

About 80 per cent of companies surveyed say authorities should go ahead with the hike, the poll showed.

Some 18 per cent said no extra stimulus was needed, but 61 per cent said additional steps are necessary.

"To prevent consumption from slumping after the tax hike, further tax breaks will be needed, such as increasing items subjected to lower tax rates," a manager of a construction firm wrote in the survey.

Just 21 per cent said the planned tax increase should be scrapped altogether, according to the April 3-15 survey.

GROWTH OR REFORM?

Some respondents said boosting government spending defeats the point of the tax hike.

"Raising the tax is meaningless if it involves stimulus to boost spending," a service firm manager wrote in the survey.

Others expressed concern that the tax hike would undermine Japan's economic growth, which is already weak.

"Even with higher taxes, government revenue won't increase because consumer spending will decline and corporate profits will deteriorate," a manager of an electric machinery maker wrote.

Some economists have warned that Japan could slide into a recession as companies are feeling the impact of the Sino-US trade war and global slowdown, chilling business investment and demand.

Yet Japan needs to shore up its finances as its population rapidly greys. The Organisation for Economic Cooperation and Development (OECD) urged Japan on Monday to raise the sales tax to as high as 26 per cent.

The Reuters Corporate Survey, conducted monthly for Reuters by Nikkei Research, polled 478 large and mid-sized firms with managers responding on condition of anonymity. About 230 firms answered the questions on the sales tax issue.

LONG HOLIDAY

Asked about their operational plans for the unprecedented 10-day holiday in late April and early May to mark the ascension of the new emperor, 47 per cent of companies said they would partially halt operations and 38 per cent said they would suspend business completely.

The remaining 15 per cent said they don't plan to stop operations at all.

Nearly half, or 47 per cent, said they didn't expect the long break to impact their business. Some 28 per cent said they expected to see a drop in output or sales compared to a year earlier, while a quarter projected an increase.

Some reported seeing a bump up in demand as customers stock up on products to cope with the 10-day break as well as due to uncertainty about Brexit, the survey showed.

REUTERS