So the Japanese economy is booming, and the Cabinet Office cranked up its estimate of GDP growth in the April-June quarter to 3.8% on an annualized basis, from an initial reading of 2.6%, driven by higher estimates for capital spending and government outlays. Consumer spending was knocked down a tad. In the same breath, the January-March quarter was revised up to 4.1%. Three quarters in a row of growth, fed by something we’ve seen before. In 1996. And it ended in tears.
The consumption tax hike. Passed in parliament last year, it was so despised that it triggered the collapse of the Noda government. But three quarters ago, it started to worm its way into the decision models of those with the money to make large purchases.
If the government gives it the final nod, the current 5% consumption tax will be raised to 8% on April 1, 2014, and from 8% to 10% on April 1, 2015. Unlike sales taxes in many US cities and states, the consumption tax is broad based and hits big-ticket items, such as “investments” in housing and business purchases.
Back in 1996, when the consumption tax hike from the then 3% to 5% was passed, to take effect on April 1, 1997, everybody with the means to do so went out and bought these big-ticket items. The economy jumped. In the January-March quarter 1996, GDP grew 3%, in the April-June quarter, it soared 4.3% on an annualized basis. Primary drivers? Um, consumers plowing money into housing, appliances, cars, etc., and businesses spending wildly on whatever they might need. Just like in today’s release.
The breath-taking recovery was ballyhooed around the world and had, I must sheepishly admit, almost nothing to do with my arrival in Japan at that precise moment. The money I spent on love hotels, rent, and simple dates that ended up costing $400, including breakfast, had only a marginal impact on GDP.
The country was still phenomenally expensive, a background drumbeat in my recent book about Japan that a reader called “a wonderful reminder of how bubbles get created and evaporate... a must read for everybody trying to understand the enigma inside the riddle of Japan.” Another reader thought it was a “funny as hell non-fiction book about wanderlust and traveling abroad.” Read the first few chapters for free.... BIG LIKE: CASCADE INTO AN ODYSSEY.
What happened back then was this: the Japanese decided that, if they could avoid paying 2% in taxes on big ticket items by pulling them forward a few months, they would! And they did. Massively. It goosed GDP. It made everyone look good. Even the government.
Alas, when the tax hike actually started biting on April 1, 1997, consumers and businesses had bought what they needed, and the hangover set in. The economy skittered into a recession that lasted a year and a half.
Even politicians, though their memories tend to lapse when needed, remember the artificial boom followed by the bust. And in 2012, it became part of the government’s strategy: On one hand, it had to do something to raise revenues in order to get a semblance of control on its out-of-control budget; and on the other hand, it wanted to boost GDP in 2013. They knew that the threat of the tax hike hanging over everyone’s head would be a big motivator. So they spaced it out over two hikes this time, and increased the total take, to create a second wave of buying in 2014, and then hope for a miracle in 2015 – though there was no miracle in 1997 and 1998.
This time, the hangover will be bad – given what’s going on in housing. Housing starts have been soaring: up 12% in July year over year, up 15.3% in June, up 14.5% in May... in a country whose population is declining! August looks to be just as strong as orders received by major construction companies jumped 13.7% in July. Housing starts have been up for 11 months in a row. The last time that happened? December 1996, a few months before the last consumption tax hike would take effect. 2013 is moving in lockstep with 1996.
It’s not just housing. In a survey by Orix Bank, 14% of the respondents said they were planning to buy appliances in order to dodge the tax hike, 13.8% would buy a car, and 13.3% would blow some money on domestic travel. Consumers and businesses alike are frontloading outlays for big-ticket items, just like in 1996. This time, too, there will be a price to pay.
However, Japanese consumers have seen all this before and are a cynical bunch. Overshadowed conveniently by the GDP up-revision hullaballoo, the Cabinet Office also released its consumer confidence index for August: It dropped to 43.4, the second-lowest level this year, the fourth month in a row of declines since the euphoric peak in May of 46.0 – euphoric by Japanese conditions. Even during the peak of the bubble in 1988-89, the index only briefly scratched 50.6. By September 1998, as part of the long hangover following, yes, the consumption tax hike of 1997, consumer confidence hit a record low of 34.8 (only to be outdone during the financial crisis). So the cycle repeats itself. Only this time, the hangover might be much worse.
For Japan’s megabanks, lending has rebounded. But instead of funding industrial projects in Japan, they’re funding acquisitions overseas and highfalutin real-estate speculation in Tokyo. They wrote up stock holdings and extracted fees from frenzied trading. Profits surged. They’re the prime beneficiaries of Abenomics. But smaller banks are not so lucky. Read... “We Don’t Feel Any Impact Of Abenomics Here”
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