Japan's thrifty consumers wary ahead of tax hike

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Associated Press

Posted on March 31, 2014 at 4:02 AM

TOKYO (AP) — Buy now or pay more later: Japanese retailers are luring customers with promises of steep discounts ahead of a sales tax hike Tuesday that economists expect to slow but not derail the recovery of the world's third-largest economy.

It's a gamble Japan cannot afford to take, given its soaring public debt.

Japan's sales tax will rise from 5 percent to 8 percent. It is the first such increase since 1997, when the combination of the tax hike, an unwinding of debt from Japan's bubble economy days and the impact of a regional financial crisis plunged the country into recession.

The 'Abenomics' strategy of Prime Minister Shinzo Abe aims to spur inflation and pull Japan out of its two-decade economic slump by getting consumers and businesses to make purchases sooner rather than later. But so far wages have not risen, and the rising cost of living seems to be triggering still more belt-tightening.

Buying ahead isn't likely to result in much of a saving overall, said housewife Kyoko Takahashi, 77, doing her daily shopping in the vegetable section of a supermarket in Urayasu, a Tokyo suburb. "Besides, I could end up buying something which I don't need."

Japanese television networks and newspapers are running features about which products to buy in advance, generally big ticket items where the cost increase will pinch most. The consensus: hoarding relatively cheap daily necessities such as toilet paper and soy sauce makes little sense for typically cramped homes with limited storage space.

The tax hike is needed to help cover soaring costs for pensions and health care as well as massive government stimulus spending meant to force the economy out of doldrum. Japan's gross public debt is more than 1 quadrillion yen (about $10 trillion), or nearly 250 percent of gross domestic product.

The strategy could backfire, however, if the economy plunges again into recession.

Household spending fell 1.5 percent in February from a year earlier, suggesting consumers are saving rather than spending ahead of the sales tax hike. Relatively cold weather and two big snows in the Tokyo area also put a damper on car sales, one of the biggest factors in such data.

Industrial output unexpectedly fell 2.3 percent in February from a month earlier, which Harumi Taguchi of HIS Global Insight said was possibly due to a winding down of construction after last year's public works building boom.

A sustained slowdown in economic growth would make it difficult for the government to go ahead with another increase to the sales tax in 2015, Taguchi said in a report.

That increase, of 2 percentage points, would take Japan's sales tax to 10 percent and is a key part of the government's plan to fix public finances.

Retail spending may rebound in March on a rush of last-minute buying, said Junko Nishioka, an economist at RBS Japan Securities. She points to rising corporate capital investment and higher prices for durable goods such as televisions as signs the economy is on the right track.

Over the weekend, electronics shops were packed with people looking for last-minute bargains.

Apart from the tax hike, prices are rising, though at a slower pace than expected. With inflation at 1.3 percent, short of the official 2 percent target, expectations are rising that the central bank may expand its monetary stimulus further to help cushion the tax hike's blow to growth.

Manufacturers and other companies are taking the opportunity to raise prices on many products and services, from subway tickets and vending machine drinks to school fees and haircuts.

None of this is welcome news for consumers, especially the majority of workers who have yet to see any significant increases in take-home pay and seniors living on fixed incomes.

"Well, there is no choice. So, I have to accept it. But, it would be good if the tax could stay at 5 percent," said retiree Shinichi Ogawa, as he looked over a shelf of fresh spinach.

Abe has promised more stimulus for the economy if the tax hike proves a harsher blow than the government expects. In theory, rising consumer demand should help push wages higher, especially given the shrinking of Japan's labor force as its population falls and ages. But while some major manufacturers have raised wages slightly, employers overall have instead increased overtime work and hiring of part-time workers.

Kozo Shibamura, general manager at a Daiei supermarket, said sales at his outlet are up 20 percent from a year earlier. He agrees with economists such as Nishioka, who are forecasting the economy will contract a bit before bouncing back in the summer.

"I think the tax hike could affect sales for about two months at the beginning. Then, we think it will return to normal," Shibamura said.

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Associated Press writers Miki Toda and Kaori Hitomi contributed to this report.

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