Japan's Central Bank Chief Expects Tax Hike Effects to be Contained - International Buzz | Financial Buzz

Japan’s Central Bank Chief Expects Tax Hike Effects to be Contained

Yen, Japan, GDP, Governor, Bank of JapanAn increase in consumption tax will have a less negative impact than what was feared, according to the Governor of the Bank of Japan, Haruhiko Kuroda. He has predicted that the resultant effects will be contained. Kuroda is also hopeful of a Japanese economic recovery in the third quarter.

Context and action taken

The Asian country increased its sales tax in April from the previous 5 percent to the present 8 percent. This has been done as part of an effort to lower the huge Japanese debt pile. The nation has the distinction of having the world’s biggest debt to Gross Domestic Product (GDP) ratio, currently standing at a staggering two to one. This decision, however, has come under intense criticism where many have warned that the action could effectively sabotage the nascent recovery of the economy.

Kuroda has noted the dramatic decline of consumption since the tax was increased and has maintained his optimism of the innately strong Japanese economy shrugging off the temporary negative outcomes of such a move.

Expected trajectory

In an interview with CNBC, Kuroda told the press that prior to the increase in consumption tax, there was an increase in the consumption on expenditures relating to non-deliverable items. Post hike in consumption tax, the consumption noticeably declined. He added that the consumption decrease after the increase in tax went as it was expected. Kuroda expects the Japanese economy to begin recovering from July to September quarter.

The economy of Japan developed 0.7 percent in last quarter of 2013. This is a continuation of positive growth in its fifth consecutive quarter. The credit for this achievement has largely been due to “Abenomics”, the revolutionary plans by Shinzo Abe, the Japanese Prime Minister to boost his country’s economy. The Bank of Japan is an important player in this context to ease the monetary policy of Japan.

Inflation control 

The Bank of Japan has also established its aims of increasing the rate of consumer inflation to 2 percent at fiscal end of 2015/2016. Kuroda has affirmed that this plan remains firmly on track. According to the Governor, the rate of inflation was a negative 0.5 percent when the framework for a new monetary policy was started. It is now 1.3 percent in positive territory. It is clear that the inflation scenario has changed for the better in a span of one year.

The Governor also mentioned the growth of wages, and the way it has tried to maintain a balance with the increasing rate of inflation. Kuroda said that the rate of unemployment, which remained more or less constant 3.6 percent is a sign of a better period to come.