Japan's economy has been
rather disappointing over the past few years. Let's break it down using our
1-2-3 method.
#1) Have there been any
significant tax changes?
#2) Have there been any
significant monetary changes?
#3) Are there other
significant factors we've missed?
We can take care of #2
and #3 first, since the tax changes are what I want to focus on here.
#2) Monetary conditions are
highly reflationary/inflationary. There has been some economic progress now
that the burden of monetary deflation has been lifted ... but not enough.
This improvement in monetary conditions should provide a bigger boost than
we've seen. Interest rates remain very low, which should be a plus. On the forex side, the yen has been rising somewhat recently
against the dollar, but not so much against the euro. There has been some
"competitive disadvantage" from this yen rise, but still not quite
enough, in my opinion, to explain the rather poor showing of the economy and
stock market.
#3) Other factors. Japan,
for the most part, has not participated in the property/silly credit bubble
seen in most of the developed world. Banks, however, do have some exposure
here, and will take some losses. Trade with China et. al. has been a two-way
street. Imports of consumer goods has been matched by exports of capital
goods, for the most part, resulting in closely matched trade accounts.
#1) Tax changes. The trend
is clearly up. Here is a summary of tax code changes I've been able to put
together thus far.
Payroll taxes UP
2004-2017 increase payroll taxes by 0.354% each year, total from 13.6% to
18.3%.
Comment: This is a
"two-sided" tax, just as in the U.S. So, the real increase is 13.6%
(employee) + 13.6% (employer) = 23.9% effective to 18.3%+18.3%=30.9%
effective. That's a big rise, from an already high base. Also, in Japan there
is NO upper limit on income subject to the payroll tax. This has been ticking
up for a few years now already, a steady worsening of macro conditions in
Japan. This tax was around 7.5% in 1970.
Capital gains and
dividend taxes on equities UP
2001: Abolishment of 1.05% gross option postponed 2yr to 1 April 2003
2003: Dividends taxed at "reduced rate" of 10% by withholding for
five years. Afterwards, dividends taxed at 20% by withholding.
2003: Capital gains on listed stocks taxed at 10% for five years.
2007: Abolish the current reduced tax rate at 10% for capital gains and
dividends starting January 2009. (Move to 20% rate.)
Comment: Capital gains taxes on
equities were traditionally untaxed in Japan, as is also the case in Germany,
Singapore, South Korea and other places. This changed in 1989, with the
introduction of a 20% capital gains tax, but also an alternative tax of 1.05%
of the gross sales price. So, if you had capgains
of more than 5% or so, you tended to pay the 1.05% alternative, as that was
cheaper. MOF has been trying to implement a capital gains tax for decades. It
appears that in 2003, the 1.05% alternative was eliminated, but a special 10%
capgains rate was applied. Effectively, the capgains rate went from near-zero to 10%. At the
beginning of this year, it appears that the change to a 20% capgains rate will be made effective by January 2009. Also,
it appears that taxation on dividends has effectively gone up, via the
hard-to-avoid dividend withholding tax.
Taxes on interest income
UP
2002: Exemption of interest income on Maruyu
deposits (for elderly) to be reformed in January 2006 and applied to only
those owned by disabled persons etc. Effectively eliminated.
Comment: Interest income in Japan
was traditionally tax free, or nearly so, by use of a number of various
loopholes. It appears that the last of these loopholes are being eliminated.
This likely means that interest income is now taxed as regular income.
Land -related taxes DOWN
2001: Long-term holdings of land capgains taxed at
26%.
2001: Suspension of application of the additional tax on capgains
on sales by corporations, 10% for short-term and 5% for long-term. Extended
to 31 Dec 2003.
2002: Registration and License tax for "qualified fireproof high-medium
rise building and its premises" reduced to 2.5% from 5%.
2003: Registration and License tax reduced to 1% for FY2003-FY2005, 2% afterwards.
2004: Capgains on long-term land and housing
reduced to 20% from 26%.
Comment: The problems in Japan's
property industry can be traced in part to an explosion of property-related
taxes beginning in 1988 (in the Tokyo area) and spreading to the rest of the
country by 1991-1992. These super-high taxes began to come down somewhat in
1998. The trend has been for property-related taxes to ease a bit lower, but
they are still much higher than was the case in the 1980s.
Inheritance taxes DOWN
2003: top rate cut to 50% from 70%
Income taxes UP
2003: Spousal allowance of Y380,000 max to be abolished.
2004: Public pension deduction abolished
2004: Exemption for elderly (Y500,000) abolished
2005: "rate of tax credit reduced from 20% to 10%" Ceiling on tax
credit reduced from Y250,000 to Y125,000. Local inhabitants tax reduced from
15% to 7.5%. Ceiling reduced from Y40,000 to Y20,000.
2006: "Remaining half of across-the-board tax credit abolished."
Comment: Income tax rates
generally fell during the late 1980s and 1990s. For now, the rates appear to
be stable, but effective taxes have been heading higher via elimination of
various deductions. The "across-the-board tax credit" was a tax cut
from around 1998. Basically, you figured your taxes by the normal means,
then, on the last line of the return, you reduced the figure by 20%. That's
pretty big. In 2005, this reduction was cut to 10%, and in 2006 it was
eliminated. In effect, your taxes rise by 25%, not a small figure. If you
combine the payroll tax hikes PLUS the elimination of exemptions PLUS the
elimination of the tax credit, that adds up to some significant income tax
hikes over the past five years or so.
But, perhaps most
important, the trend of tax discussions in Japan has taken a rather worrisome
turn. I expected this from years ago -- that, faced with the huge debts and
the large number of retirees, the government would trend toward much higher
taxes. This won't work in practice. In practice, the private economy must pay
for everything, including the government and retirees. Who or what else could
pay? The more you raise taxes, the worse the private economy functions,
and thus the less capable it is of generating the surplus and abundance that
can pay for retirees and government programs, or debt service.
The crazy bureaucrats at
the Ministry of Finance have been trying to implement a European-style
double-digit consumption tax since the late 1970s. Why, I don't know. It's
some sort of weird Moby Dick project for those clowns. From 1950 to 1989,
there was no sales tax in Japan. Guess what -- no disasters happened. In
1989, the first one was implemented, at a 3% rate. At the time, the
government was running a surplus. There was no practical reason for such a
tax.
Recently, the politicians
have been talking about raising the consumption tax (now 5%) to 11%-17%, with
the next hike possibly in April 2009. Yowza.
The likely result of all
this: economic underperformance. When combined with inflation, as is likely
going forward, the likely result will be some serious economic deterioration.
The result of that, as long as the present political approach to taxes
continues, will likely be higher taxes. As the private economy deteriorates
(high or rising taxes and monetary instability), it is less and less able to
afford niceties like nursing care. The more the politicians raise taxes, the
more the private economy would deteriorate. In the end, Japan may end up like
Italy, with an excellent cultural heritage but a depressed economy.
* * *
John Williams, of
shadowstats.com, has offered one issue of his paid newsletter for public
consumption. He was persuaded by Howard Ruff of the Ruff Times. Worth a peek.
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has
appeared on financial television in the United
States, Japan,
and the Middle East. About the Book: Gold:
The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is
available at bookstores nationwide, from all major online booksellers, and
direct from the publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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