Is the Japanese Economy More or Less Able to Absorb a Tax Increase in 2014 vs 1997?May 02, 2014
With Japan’s consumption tax increase in full swing (sales tax rates rose from 5% to 8% in April) we’ve seen a lot of speculation as to the effects of the tax increase on the Japanese economy. Most commentaries make some sort of comparison with the last time the consumption tax was increased in April of 1997, when the tax rose from 3% to 5%. Japan’s economy experienced moderate weakness immediately following the tax increase and then more acute weakness in 1998-1999 as the Asian financial crisis took hold of the region. Real GDP did not exceed the 1997 peak until Q1 2001. The tax increase is often blamed for the recession from 1997-1999, but it is hard to distinguish the effects of the tax increase from those stemming from the Asian financial crisis. In any case, we thought we’d provide an objective comparison of economic variables between 1997 and 2014 so we can better see the differences in the economic circumstances facing Japan in both periods.