Will the Levy Break It? : Some in Japan Worry That a Stiff Hike in the Consumption Tax Next Week Will Stop the Country's Recovery in Its Tracks

By DAVID HOLLEY

March 28, 1997 12 AM PT

TIMES STAFF WRITER

TOKYO —

The trendy Harajuku district, a favorite weekend hangout for Tokyo young people, has been jammed lately even on weekdays--with shoppers like Sayaka Onoda, 20, who was in a rush to buy $400 snowboarding boots.

At the upscale Tears Moon jewelry shop, just off elegant tree-lined Omotesando Avenue, sales are up “at least 30%” in recent weeks, with most customers buying expensive jewelry costing $800 or more, manager Atsuko Watanabe said.

And all across Japan, motorists have been grabbing up new automobiles at a 10% faster pace than last year, reports the Japan Automobile Manufacturers Assn.

Are boom times back? Not exactly. Folks here are rushing to buy before Tuesday, when a 67% hike in the national sales tax goes into effect. The big question: Will the stiff tax increase stop Japan’s economy in its tracks?

The worry is about people like Tokyo housewife Shizuko Ono, who says the tax hike--to 5% from 3% on most items people buy, including food--makes her angry.

“It really upsets me,” said Ono, 51. “If I buy something expensive, 2% extra makes a big difference. It’s such a big burden financially and emotionally.”

As the Japanese public responds with a mixture of irritation and resignation, the behavior of shoppers in coming months may determine whether Japan’s recovery from its worst post-World War II recession develops self-sustaining momentum or slips toward another extended slowdown.

Japan’s consumption tax--similar to a sales tax but applying to a wide range of goods and services--has stood at 3% since 1989, when it was introduced amid bitter controversy. Its big jump Tuesday, which begins a new fiscal year, will be accompanied the same day by an income tax hike that will trim about 0.7% from the take-home pay of the average worker.

Some economists fear that the government may be overconfident about the strength of Japan’s economy--and that it risks triggering a severe slowdown, or even a new recession.

“Real disposable income [for Japanese households] is likely to fall outright in fiscal 1997 for the first time” since shortly after World War II, said Jeffrey Young, an economist at Salomon Bros. Asia Ltd., who predicts that Japan will see a sharp reduction in economic growth this year.

Japan enjoyed strong real economic growth of 3.6% last year--compared with 2.4% for the United States--but the expansion was boosted by stimulative government spending and the export-promoting effects of a rapidly weakening yen.

The Japanese government contends the economy is now strong enough to endure a policy shift toward key long-term goals: boosting revenues, trimming government spending and shifting more of the tax burden to consumption taxes.

The idea is to bring a ballooning government deficit under control and create a new tax structure better suited for the 21st century, when Japan will have many more elderly citizens and fewer workers to support them through income taxes.

A higher consumption tax means that retirees, along with everyone else, would pay more tax on purchases than they do now. That money could be used to support the elderly poor or pay for other expenses, such as nursing home construction, that are associated with an aging society.

The government promises the tax increases will be paired with cuts in unnecessary spending. Prime Minister Ryutaro Hashimoto proposed this month that the government slash the combined annual budget deficits of central and local governments to less than 3% of gross domestic product by 2003, compared with a projected 5.3% for fiscal 1997.

“Politicians must assume responsibility for carrying through painful spending reform,” Hashimoto declared.

Government officials insist that now is the right time to impose higher taxes. “Any negative backlash . . . after the consumption tax hike is likely to be mild,” predicts Masayuki Matsushima, head of the Bank of Japan’s research and statistics department.

Among private analysts in Tokyo, the more optimistic ones say that while these new policies will trigger a slowdown from last year’s strong growth, it will not be too bad.

Matthew Poggi, an economist at Lehman Bros. Japan Inc., predicts that stores, afraid of competition, won’t dare pass on to consumers more than half the tax increase. He predicts wage growth will run 2% above the impact of the consumption tax hike. With the yen at its weakest level in several years, he added, Japanese exports should grow enough to largely compensate for fiscal tightening.

“The perception of so many people in Japan is that the economy is at a standstill, and this fiscal tightening is going to push the economy back to where it was in the early 1990s,” Poggi said. “The fact is Japan’s GDP [gross domestic product] growth rate in 1996 was the highest of the G-7 countries. It’s hard to believe [because] the perception is that the Japanese economy is dead.”

Despite the tax increases, Lehman Bros. is predicting 2% real growth this year and 2.9% growth in 1998, Poggi said.

While many Japanese see planning for the long term as a laudable goal, there is widespread skepticism among ordinary citizens that they will ever see any benefits from paying higher taxes now.

“The idea of preparing for our future society is good,” said Hideyuki Tanaka, 26, a computer salesman. “But I doubt the government will really use this extra tax money in meaningful ways.”

This tax hike is “more serious” for him than the initial 1989 tax of 3%, Tanaka said, because he was single then but has a family now.

Analysts agree that the economy will record fairly strong growth in the first quarter of this year, as consumers rush to beat the tax hikes, but will cool sharply or contract in the second quarter.

The big questions are how bad the second-quarter slowdown will be, and whether sales and economic growth will bounce back.

“Some economists who are pessimistic about the economy predict a greater decline in the April-June quarter, and they see a consecutive decline in July-September,” said Tetsuro Sugiura, chief economist at Fuji Research Institute. But “right now we don’t think the economy would go into serious recession after the rise in the consumption tax.”

Many auto manufacturers have said they will initially absorb much of the consumption tax increase. Some citizens figure that phenomenon will be widespread.

Yoshitaku Hirose, 51, a shoe repairman, complained about the tax hike but predicted that people will quickly adjust. “Japanese very easily forget about things,” he said. “So I assume we will get used to this 5% and start buying again.”

Etsuko Kawase of The Times’ Tokyo bureau contributed to this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Slowdown for Japan?

Some analysts fear a big jump in the national sales tax April 1 will slow Japan’s vulnerable economy by reducing consumer spending.

GDP

Predicted real gross domestic product growth, 1997:

Britain: 3.3%

France: 2.5%

United States: 2.2%

Germany: 2.2%

Japan: 1.6%

DISPOSABLE INCOME