TOKYO (Reuters) - Japanese companies increasingly expect to bounce back from a sales tax increase by the end of the year and are more willing to raise wages, a Reuters poll showed, adding to evidence that the hike is unlikely to derail a recovery in the world’s third-biggest economy.
Prime Minister Shinzo Abe’s government hiked the sales tax to 8 percent from 5 percent last month in a bid to curb Japan’s runaway public debt. But the move has been controversial with some economists arguing it could dent the success achieved so far through aggressive monetary easing and hefty government spending.
Consumers typically spend big in the months ahead of such tax hikes and tighten their purse strings for some time afterwards. A sales tax increase in 1997 has been blamed for helping to depress economic growth and for creating the deflationary mindset that has weighed on Japan for some 15 years.
The Reuters Corporate Survey, conducted between April 25 and May 12, showed 63 percent of respondents expect sales to rise above year-earlier levels by the year’s end, up from 59 percent in March and 49 percent in December.
“The overall economy is reflecting the sense that people are getting used to the new tax rate, and income and employment are on the mend, especially among large firms,” said an executive at a retail company, one of 240 respondents that replied to the question on the impact of the sales tax hike.
The survey also found 37 percent were willing to raise income levels for workers as a result of “Abenomics”, up from 8 percent in November.
While other data has indicated that wage rises alone have not been enough to cover the 3 percentage-point increase in the sales tax, some big firms have been generous with bonuses, putting workers comfortably ahead, at least for now.
The broadly positive outlook was echoed in comments from Vice Economy Minister Yasutoshi Nishimura, who told a Reuters Japan Summit on Monday that the economy is reacting as expected to the tax hike and is likely to rebound as higher base pay and bonuses will more than offset the impact of the higher levy.
Nishimura added, however, that the government and the Bank of Japan stand ready to take further action if needed.
Improvements in both workers’ income levels as well as capital spending are seen as key to Japan transitioning to a sustainable recovery, and fresh data for capital spending this week also underscored economic resilience after the sales tax hike.
Japanese businesses raised orders for machinery by the most ever in March - an eye-popping 19.1 percent compared with 6.0 percent gain forecast by economists in a Reuters poll. The government data also showed the firms expect book more orders this quarter, with core orders seen up 0.4 percent for a fifth straight quarter of gains.
Some respondents also mentioned a robust contribution from exports, which have benefited from a weakening in the yen in the wake of monetary easing.
“We saw a bit of a pullback in April, but we expect to rebound well above year-earlier levels in May, so the pullback should end there,” wrote an executive at an electronics maker.
“Also, since export deals overseas weren’t affected by the sales tax hike, there’s no last-minute buying or pullback, and that factor will help ease the overall impact on earnings.”
The Corporate Survey, conducted for Reuters by Nikkei Research, polls firms in tandem with the Reuters Tankan survey, which showed on Monday that Japanese business confidence slid as the tax hike cooled activity but the mood is seen improving in the months ahead.
The survey polls upper management at 400 companies each capitalized at more than 1 billion yen. The firms, split evenly between manufacturers and non-manufacturers, respond anonymously.
(This story has been refiled to add dropped word “the” in first paragraph)
Editing by William Mallard and Edwina Gibbs