Consumption tax hike to 8% all geared up in Japan

From the current 5%, the tax will gradually climb to 8% in April 2014, then 10% by October 2015.

According to DBS, the government bill of raising consumption tax (VAT) was ratified by the upper house of parliament last Friday. The VAT rate will be raised from the current 5% to 8% in April 2014, and to 10% in October 2015. Yet, the bill contains a flexibility clause that allows the government to postpone/cancel the tax increases if economic conditions deteriorate.

Here's more from DBS:

We reckon that CPI inflation will be boosted to 2% in 2014, if the first VAT hike is successfully enacted. But real GDP growth is likely to fall to 0-0.5% in 2014 due to higher inflation that erodes real incomes, even if considering the cushioning impact of household savings. As the first tax hike will dampen growth significantly, the implementation of the 2nd VAT increase in 2015 would be politically difficult.

Raising VAT is aimed to repair public finances. The VAT revenues collected by the central government are equivalent to 2% of GDP currently. If the VAT rate is doubled, it should increase tax revenues and reduce the central government’s primary deficit
by 2% of GDP. This will still leave the primary deficit at 2% of GDP by mid-2010s.

Obviously, doubling the VAT will be far from sufficient to stabilize the public debt. Further fiscal / economic reforms are needed. Otherwise, risks remain that the continued ballooning of public debt in the coming years will ultimately undermine investor confidence in the JGB market and in the yen.