The Economist USA - 22.02.2020

The EconomistFebruary 22nd 2020 37

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E

conomists stillargue about the mer-

its of Abenomics, the experimental mix

of policies introduced by Japan’s prime

minister, Abe Shinzo, seven years ago, in an

effort to chase away deflation and stagna-

tion. But two lessons are beyond debate. Ja-

pan’s bond market is remarkably docile de-

spite the government’s towering debt.

Japanese households, however, are pain-

fully sensitive to increases in the con-

sumption tax, a broad value-added tax im-

posed on most of their purchases. After the

government raised the tax from 8% to 10%

on October 1st, the economy shrank at an

annual pace of 6.3% in the fourth quarter of

2019, according to figures released on Feb-

ruary 17th (see chart on next page).

The tax increase was an unforced error.

The government faces no immediate need

for additional revenue. Despite gross debt

nearing 240% of gdp, its borrowing re-

mains absurdly cheap. The yield on a ten-

year government bond is stuck at about

zero, where the country’s central bank, the

Bank of Japan (boj), has pegged it since

2016. That peg obliges the bojto buy as
      much government debt as necessary to
      keep long-term interest rates low. Such de-
      termined efforts to stimulate borrowing
      are needed chiefly because private spend-
      ing has been weak—too weak, at least, to
      lift inflation to the boj’s target of 2% from
      the current 0.8%. Thus the consumption-
      tax rise was doubly strange. It made it even
      harder for firms to sell goods to Japan’s in-
      hibited consumers, for the sake of reduc-
      ing the number of bonds Japan’s govern-

ment sells to a customer who has sworn to

bid for them anyway. It was like adding bal-

last to the waterlogged side of a ship.

The error was foreseeable as well as un-

forced. A rise in the same tax in 2014 was

followed by a similarly dramatic contrac-

tion in the economy, undermining the ear-

ly momentum of Mr Abe’s reflationary

push. The government had hoped to avoid

a repeat of that experience by sparing food,

newspapers and drinks (except alcohol)

from the higher rate and by adding various

compensatory measures. These included

free child care and education for pre-

school kids and a “rewards” system giving

discounts to customers who make cashless

purchases in small shops and convenience

stores. These measures may have softened

the blow in some ways: consumer spend-

ing on non-durable goods fell by less last

quarter than it did in the 2014 episode. Un-

fortunately, these offsetting measures

were themselves offset by another aggra-

vating factor: the impact of Typhoon Hagi-

bis, which inundated many towns and

killed almost 100 people in October. As a

consequence, capital spending by firms

shrank even faster than it had after the tax

increase six years ago.

The economy’s prospects for recovery

are threatened further by the new corona-

virus. Covid-19 has already killed one per-

son in Japan; 73 have been infected (not

Japan’s economy

Typhoon, pestilence and tax

Mistimed austerity and natural adversity prompt an alarming contraction

Asia

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