Japan Needs 2% Inflation for Tax Hike: S&P Gruenwald
(Bloomberg) -- Japan shouldn’t increase its sales tax until inflation hits the 2 percent target and nominal economic growth reaches 3 percent, according to Paul Gruenwald, Global Chief Economist at S&P Global Ratings.
While the levy is slated to increase by 2 percentage points to 10 percent in October next year, economists surveyed by Bloomberg project inflation at only half the target then, and in the most recent quarter for which data is available, the Japanese economy contracted.
When these two measures are anchored in healthy territory, "then do the consumption tax increase," he said in an interview in Tokyo on Thursday. Gruenwald added that his views weren’t necessarily in line with his colleagues who determine sovereign ratings.
Japan’s economy plunged into recession when the government pushed the tax to 8 percent from 5 percent in 2014. Prime Minister Shinzo Abe has since twice put off another scheduled increase, but has said repeatedly that he will go ahead with the 2019 move.
"The timetable for any of this stuff shouldn’t be fixed in stone," Gruenwald said. "It should be all dependent on the economy."
Fiscal stimulus, preferably in the form of government spending, is also a possibility if rising trade tensions between the U.S. and China weigh on Japanese economic growth, according to Gruenwald. He doesn’t anticipate Japan will directly suffer much from tariffs between the world’s two largest economies, but he said business confidence and investment could be affected.
"If it knocks the economy back into zero growth or recession, then obviously there’s a case for fiscal stimulus," Gruenwald said. He added that if growth doesn’t rebound from a contraction in the first quarter, then more spending certainly "would be on the table."
To be sure, Japan will eventually have to rein in spending and address its massive public debt, but fiscal consolidation shouldn’t come at the expense of the government’s larger economic goals, Gruenwald said.
"The BOJ is the biggest holder of JGBs anyway, so we shouldn’t be too worried in the short term about more increases in the debt stock," he said. "The number one macro issue has to be to reflate the economy."
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