“A Closer Look at Japan’s Rising Consumption Tax”

That’s an important new Economic Brief by Thomas A. Lubik and Karl Rhodes of the Federal Reserve Bank of Richmond:

Japan plans to raise its national consumption tax next week from 8 percent to 10 percent. Some commentators and economists have blamed previous consumption tax increases for causing recessions in 1997 and 2014, but little statistical analysis has been published to support or refute such claims. This Economic Brief  highlights new evidence that significant changes in Japan’s household consumption behavior did in fact coincide with the 1997 tax hike.

This issue is important as Japan is on the cusp of raising its consumption tax in just a few days.

28 thoughts on ““A Closer Look at Japan’s Rising Consumption Tax”

    1. Dave

      “So, in summary, tax increases in Japan… bad. Now about the Warren/Sanders proposals.”

      Initial thoughts are that consumption taxes are regressive. Those with less income pay a higher share of their income towards consumption. So it makes perfect sense that a consumption tax increase in Japan would lower economic growth. It also makes perfect sense that income and wealth taxes are likely to have little effect. But Bruce Hall is not a very smart man, so I don’t expect him to get any of that.

      1. pgl

        Warren and Sanders want wealth taxes (progressive). Consumption taxes are very different. But don’t both Brucie boy with such trivial details as it might mess up his MAGA hat.

    2. 2slugbaits

      Bruce Hall So are you suggesting that the Warren/Sanders proposals would reduce the deficit? I thought you complaint was that it would raise the deficit.

      Japan might be a good guinea pig to test MMT.

      1. Moses Herzog

        @ 2slugbaits
        I don’t suppose you’d believe me if I told you my cutesy reply to pgl was made before I saw the last sentence of your comment there.

        Kelton has made prior comments as regards Japan and MMT. My guess is Menzie would take issue with those (i.e. semi-strongly disagree). I think Kelton at least had it HALF-right. But whether she “hit the nail on the head” is pretty open to debate.

        1. 2slugbaits

          Moses Herzog I’m an MMT skeptic. I was simply suggesting that Japan might be an ideal guinea pig to test the theory. Japan has a lot of policy challenges ahead and you need at least as many policy tools as you have policy objectives, so MMT wouldn’t solve all of Japan’s problems. But it might (emphasize might) ameliorate Japan’s public debt-to-GDP problem. My problem with the voxeu.org article isn’t with anything the author said about the risks associated with MMT. My problem is that she didn’t balance the risks of testing MMT with the risks associated with relying upon more mainstream approaches, which haven’t been entirely successful either. Most of the voxeu.org article (correctly) pointed out that MMT does nothing to address Japan’s aggregate supply problems; viz., aging population, aversion to immigration, weak total factor productivity, etc. I don’t disagree with her, but this same criticism applies equally to Japan’s current macroeconomic policy choices. I’ve never understood MMT as a cure for supply side problems. I always understood MMT as something to tame the business cycle by managing the aggregate demand side. Like I said, I am not at all convinced that MMT would in fact stabilize aggregate demand. It seems to me that it is far more likely to destabilize aggregate demand over the long run because it depends on (somehow) fine tuning fiscal policy with all of its long lags. Still, the developed world will eventually be facing the same problems that Japan faces today and it would be helpful to know if MMT might or might not be appropriate in a future world in which the bias towards secular stagnation exceed the bias for fiscal dominance. Math on the blackboard (I’m showing my age) only gets you so far. At some point you need a guinea pig.

      2. Moses Herzog

        I saw this a few weeks ago. It might have even been Menzie who posted it and drew my attention to it, my memory is so crappy anymore. I don’t agree with Professor Shiral in total, but she does seem to state her case in a relatively neutral fashion, so I’ll give her credit for that much. A little too harsh on Kelton, but there’s some gray area to argue there for sure:

          1. Moses Herzog

            I have Wray’s book and am hoping to have it read in about 6 months. But I also have “R” code memorization and newspaper reading and…..

            I’m hoping Wray’s book will help me grasp your supply constraint “complaint” a little better. Of course he’s not apt to talk to much about weaknesses but I’m hoping to grasp the MMT house plumbing layout as best I can before I go back and check that bad leak Master Stonemason and Architect Chinn is telling me about.

    3. pgl

      Your kind of tax. Tax cuts for the rich with the burden of Trump’s fiscal irresponsibility shifted to the rest of us. Atta boy – Trump should give Brucie Boy a bone!

    4. macroduck

      One long-standing view of the impact of consumption taxes on Japanese economic performance is that foreknowledge of the tax resulted in consumers moving demand forward in time. Government policy makers, at least in the earlier episode, saw the rise in demand prior to the tax increase as a sign of underlying strength, not a shifting of demand forward in time, and did nothing to address the softening in demand once the tax increase was imposed. This view is well known, and does not imply that the tax increase is destructive of demand over time. It may be that the tax increases in question were destructive of demand, but that requires additional analysis.

      So, in answer to Bruce’s question: You’ve begged the question. It is entirely possible that the tax increase was not, in itself, bad for Japan’s economy. Rather a bad mix of policies was the problem in prior episodes.

      Another point to keep in mind is that Japan runs a current account surplus and funds nearly all of its debt domestically. A tax increase, if it works to raise national saving, may in fact be bad for Japan, but that has nothing to do with whether a tax increase is a good idea for the U.S. The U.S. runs a current account deficit funds a good bit of its debt abroad. A tax increase for the U.S. may be good for the U.S.

      Both these points represent fairly elementary economic thinking and should help you understand the issue you raise.

  1. pgl

    Japan used to have a rather high corporate profits tax like the US had before that 2017 tax cut for the rich. It’s consumption tax back then was only 3%. A lot of people here as well as their said – be more like Europe and cut that corporate profits tax by imposing a VAT. Japan listened slashing its corporate profits tax and gradually increasing its consumption tax.

    Now I’m not endorsing these moves in the least. Just providing a little historical background to what may be questionable tax policy.


      Good point. I did not know that, so thanks for the info.

      EU’s malaise is definitely a result of the excessive VATs everywhere.

      Corporate and wealth taxes should definitely be raised to reduce U.S. income inequality which is now the highest in 50 years. The federal minimum wage should also be doubled.

  2. pgl

    That a higher consumption tax would lower consumption demand (raise savings) is sort of what economics teaches us. Now is this a good thing or a bad thing. Those New Classical types who think economies magically stay at full employment would argue more savings translates into more investment demand. Now isn’t that the usual case for taxing consumption instead of savings or profits? Oh wait – do this when aggregate demand is weak and Keynesians might predict a recession and that pesky Paradox of Thrift!

      1. PAUL MATHIS

        Business investment is a function of demand. — Keynes

        Should be obvious, but still a mystery to many.


      A higher consumption tax reduces consumption and therefore growth and incomes. Consequently, savings are reduced because incomes fall. — Keynes

  3. pgl

    Did some right winger write the 2nd link or what?

    “And yet, government spending continued to snowball as the country continued to fight deflation and a stagnant economy, feeding the perennially grim outlook on Japan’s aging society and dwindling population.”

    Out of control government spending. Blah, blah, blah. Demographics – blah, blah, blah. Not one word in this story about the reduction of taxation of profits. Yes – let the rich keep their dividend checks and jack up consumption taxes as one slashes payments to the elderly and the poor. Mitch McConnell must love this partisan BS.

    1. Moses Herzog

      Watch it!!!!! Keep this up and new visitors to this blog will have you pegged as an MMT’er. Frightening…….

  4. Julian Silk

    Dear Folks,

    Having read the paper, I am in accord with pgl again. Japan doesn’t have good choices, and they have a debt problem. The Japanese government has to raise money in some manner, and since they don’t have this sort of enormous slack and investment just waiting for some signal, this seems a reasonable choice, albeit unpleasant.


    1. Moses Herzog

      @ Julian Silk
      You’ve got me very confused now, I thought pgl was saying she was against the consumption tax??

      1. pgl

        My preference is to close the deficit over the long-run by relying on taxes on the rich as in profits taxes. This consumption tax strikes me as Republican screw the poor. Now there may be timing issues in terms of raises taxes when there is a lack of aggregate demand.

      2. pgl

        BTW – I’m male. Although I do live in what is sometimes referred to as Dyke Slope (Park Slope part of Brooklyn). So I’m constantly confused when flirting with a hot girl only to be introduced to her girl friend!


    Good point. I did not know that, so thanks for the info.

    EU’s malaise is definitely a result of the excessive VATs everywhere.

    Corporate and wealth taxes should definitely be raised to reduce U.S. income inequality which is now the highest in 50 years. The federal minimum wage should also be doubled.

  6. spencer

    I seem to remember that when Japan first started i its long period of economic stagnation that many observers thought one of their major problems was their rush to raise consumption taxes every time there was evidence that increased consumption might be stimulating growth.

    Moreover, wasn’t one the main reasons behind the the drop in Japanese savings rate was the aging of the population?
    If so, why would you expect minor tax adjustments to generate a significant rebound in Japanese savings? After all,that was the main reason we had to quit depending on Japanese savings to finance our twin deficits.

    At one time there was a school of thought that the US would not follow the Japanese into stagnation because we were unlikely to make the same policy mistakes.

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