I wrote the following memos this morning to prepare for a conversation with a client. It turned out that the client had a very specific prospective investment in mind, with some pointed questions about it, while much of my thoughts here went untapped—cagey investor—so I’ll post them here. Mind you, they were not meant to be comprehensive.
1. What does the Ministry of Finance want to achieve with the consumption tax hike? What does it think about companies increasing prices to keep in-line with consumption tax increases?
MOF has two problems: 1. Ever rising social insurance costs, partly funded by legally mandated premiums but increasingly reliant on transfers from the general budget, and 2) and ever-rising public debt that it sees as a looming threat to public finance and more broadly the financial market and the overall economy. Since there’s no way that the Japanese public will give way on the universal healthcare and pension systems, MOF has long decided that the Japanese government will go the European way and fund them by raising the consumption tax. Don’t imagine that the rate will stop at 10%.
Politics aside, MOF would be perfectly happy to let the market set post-hike prices. And given enough time, that will happen. But in the meantime, there’s griping from small businesses, who fear with good reason that they will be forced to swallow losses from all or most of the tax hike. And small businesses and their owners are the mainstay of the LDP’s electoral machine. Coalition partner Komeito has a similar electoral base. So special price cartels and FTC advisories encouraging pass-throughs are the order of the day for the Abe administration. Remember, MOF has significant influence over the FTC. MOF also is securing the cooperation of the other ministries in providing administrative guidance within their respective jurisdictions. It’s a jump—how high political reaction.
2. Why are businesses going along with a tax hike, one that will be repeated in future years to boot, instead of insisting on more belt-tightening?
There are a couple of reasons. First, efficiency gains to be harvested notwithstanding, social insurance expenditures are set to rise. Better consumption tax than the already-high corporate income tax. Second, beyond fiscal transfers, the government has tended to lean on the better-funded corporate employee health insurance systems to make up the premium gap. This in turn falls disproportionately on the shoulders of the better-to-do big business insurance organizations. The consumption tax hike helps cap this drain on corporate (and corporate employee) expenditures. The second reason is given little attention, but is as important as the first.