On April 1 Japan will raise the consumption tax will rise for the first time in 15 years from 5% to 8%. Predictions say the tax hike will bring in $43.6 Billion in revenue for the government which will help Japan deal with public debt at 240% of GDP. The increase in taxes, which is a part of Prime Minister Abe’s, is a concern for some Japan analysts who worry about an imminent recession. While on a positive note industrial production fell by 2.3% between January and February likely meaning that producers are preparing for decreased consumption which will keep price levels more constant in coming months. However there are several reasons for concern with the most important being falling household wealth.
Real wages have fallen 15% over the last 15 years in Japan and Abe’s plan to spur growth was a coupling of higher taxes to deal with debt concerns and higher wages to encourage more domestic consumption. While company profits have been on the rise thanks to a weaker yen company employees have not seen their wages respond to that growth. Companies, like Toyota, that have seen profits are reluctant to extend their employees higher wages partly because they lack confidence in future profits. If Abe is unable to attain the higher wages that he has pushed for consumption may continue the trend from last month which was a 2.5% decline in household spending. After aggressive monetary easing to spur inflation higher consumption taxes without higher wages could cause the first contraction in Japan in more than a year and seriously hinder Abe’s efforts to revive Japan’s economy.