October 10, 2019 / 11:08 PM / 3 days ago

Japan firms see 'Abenomics' sputtering, tax hike hurting economy - Reuters poll

TOKYO (Reuters) - Japanese companies overwhelmingly think the nation’s longest postwar expansion is peaking, with two-thirds expecting a tax hike imposed this month by Prime Minister Shinzo Abe to hurt the economy, a Reuters poll showed on Friday.

FILE PHOTO: A man chooses goods underneath banners notifying the rise in the national sales tax at a store in Tokyo, Japan September 25, 2019. REUTERS/Kim Kyung-Hoon/File Photo

Almost all the firms in the monthly Reuters Corporate Survey said the world’s third-biggest economy will level off or fall into recession in coming months, which would mark an end to the “Abenomics” expansion that the premier launched in late 2012.

And while most of the firms still don’t want the Bank of Japan to increase its stimulus, that opposition has weakened sharply over the past quarter as the U.S-China trade war has clouded prospects for global growth and export-reliant Japan.

Abe says the increase in the national sales tax, which he had twice delayed, is crucial to reining in the industrial world’s heaviest debt burden - more than twice Japan’s annual $5 trillion output. But the higher levy could cool consumer spending, triggering a recession, analysts fear.

The Reuters survey found 69% of firms expect the tax hike to weigh on growth, 26% see no impact and 5% think it could boost the economy.

“The tax hike will hurt consumer sentiment considerably, which will exert an unpredictable impact on the Japanese economy,” a manager at a food-processing company wrote in the survey.

Some 58% expect the economy to level off heading into next year, while 41% predict a recession, the survey found. Just 1% see the economy growing after the tax increase.

Economists in a Reuters poll last month forecast the economy will grow 0.8% in the fiscal year to March, up from the 0.5% predicted a month earlier.

“A combination of a post-tax hike decline in demand and a sputtering global economy will clearly exert downward pressure on Japan’s economy,” said Yoshimasa Maruyama, chief economist at SMBC Nikko Securities.

He forecasts a recession for Japan, with the economy contracting for the two quarters through March.

Companies in the Reuters survey that expected a recession largely think it will last at least a year, with a quarter expecting it to hit bottom late next year and 56% seeing the slump dragging into 2021 or beyond.

Japan’s coincident economic indicator fell in August, the Cabinet Office said this week, downgrading its assessment of the key gauge to “worsening,” which can presage a recession. Last month the office maintained its overall assessment that the economy continues to recover moderately.

The Reuters Corporate Survey, conducted Sept. 26-Oct. 7 for Reuters by Nikkei Research, canvassed 504 big and midsize nonfinancial companies, of which 230-240 firms responded to the various questions, on condition of anonymity.

BOJ STIMULUS

As the economic outlook clouds, opposition to further easing from the central bank is waning, the survey found.

Haruhiko Kuroda, installed by Abe as BOJ governor six and a half years ago to spur growth and end decades of deflation, has driven the most aggressive asset purchases among major central banks, pushing some interest rates below zero.

But while Kuroda vowed to stoke inflation to 2% in two years, the BOJ has generated price rises of less than half of that, while ultra-low interest rates are hurting banks by crimping lending margins.

Fifty-seven percent of the companies in the survey said the BOJ should not expand its massive easing, with many concerned it could weaken financial institutions. But this response was down from 88% to a similar question in July.

Some 42% of respondents said additional easing would have no effect on the economy, while the rest were split on whether more stimulus would on balance help or hurt growth.

“The harmful effects of the prolonged easing are becoming clear. Going too far would cause the banking system to collapse and the negatives would become larger,” wrote a manager at a machinery maker.

Of those who said additional easing would be a net positive, the biggest reason, at 43%, was that lower inflation-adjusted interest rates would encourage more capital spending.

In a potentially positive development for the BOJ’s aim of boosting prices, more than two-thirds of firms said they have been able to pass on the sales-tax hike to consumers in the prices of their goods and services.

But unless wages rise enough to offset the higher prices, the tax hike could erode consumer purchasing power, hurting private consumption, which makes up about 60% of the economy, analysts say.

Reporting by Tetsushi Kajimoto; Editing by William Mallard & Kim Coghill

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