Table Speech

Consumption Tax Hike and Enhancement of Productivity

October 9, 2019

Mr. Atsushi Nakajima
Chairman, Research Institute of Economy,
Trade and Industry, IAA

 Today I will talk about the impacts of consumption tax hike scheduled for next month, apart from its pros and cons. I must emphasize the situation is different this time compared with April 2014 when the consumption tax was raised from 5% to 8%. Back then, sales of automobiles, housing, home appliances etc. increased dramatically for about 6 months preceding the hike due to last-minute surge in demand. After April, however, we witnessed a reactionary drop in sales. This time, retailers’ sales have remained relatively stable due to various countermeasures taken by the government to offset the negative impact. Against the tax hike burden of 5.7 trillion yen, measures such as free pre-school education for children aged between 3 and 5, reduced tax rate for food, beverages and newspapers and point program for cashless payments are estimated to exceed 1 trillion yen. If you pay for your groceries electronically, you actually pay less after the tax hike.

 Let me highlight two points related to this tax hike. Firstly, this can be a good opportunity for small and medium-sized retailers to enhance competitiveness by digitalizing their business through introducing cash-registers for cashless payment subsidized by the government. And secondly, the introduction of reduced mobile communication fees is forecast to offset consumer price increases caused by consumption tax hike. Having said that we must not forget these countermeasures are temporary and thus, it is imperative to increase wages to boost the actual purchasing power.

 As we look at the transition of nominal wage and consumer price index, consumer price increases have continued to exceed wage increases since the late 1990s and the gap has widened and continued for a longer period each time the consumption tax rate was raised. We must keep a close eye on whether the so-called “spring offensive” or the annual wage negotiations between management and labor unions next year will result in substantive and steady wage increases.

 Now, let me move on to the second theme of how to enhance productivity of Japanese companies. If we look at the markup rate (difference between a product’s selling price and cost as a percentage of the cost) since 2010 after the bankruptcy of Lehman Brothers, it rose dramatically for companies in Europe and the USA while it showed very weak growth for Japanese companies. It means that the profitability gap between Japanese and Western companies has been expanding over the last 10 years. The main reason is because Japan lags behind in the utilization of IT technology and Big Data as well as globalization that undermine our competitiveness. Unfortunately, Japanese companies have not kept up with developing new products and services that create added value to business. Also, it has negatively affected our productivity. When we compare industry-specific productivity with that of the USA, it is lower for all major industries. The gap is even wider for non-manufacturing sectors including telecommunications (less than 40%) as well as wholesale and retail (about 30%).

 As we look at the transition of investment in intellectual property including know-how and software of five major countries of the USA, Germany, UK, France and Japan, our country again lags behind. The overall trend is a moderate growth from 2015 onwards in AI (Artificial Intelligence) and innovative know-how and software, with the USA making the largest investment. There is much room for Japanese companies to boost investment not only in hardware but also in software.

 I must highlight that investment in human resources is also the key in enhancing productivity. Unfortunately, our country has the lowest ratio in terms of capital allocation for human resource development against GDP among the six nations of the USA, UK, Germany, France, Italy and Japan. Japanese companies emphasize OJT (on the job training) and tend to overlook the importance of employee training. As Japan suffered economic stagnation during the so-called Lost Two Decades, companies might have cut on training budgets. But now, business is picking up for many Japanese companies, yet investments in human resources stay stagnant.

 As we approach a new era of AI, corporate competitiveness will depend on attracting and retaining competent human resources who can harness innovative technologies by making extensive application of basic skills. On the other hand, companies also need employees with more humane response that AI is not cut out for. I believe a well-balanced investment in IT, intellectual property and human resources as well as improved utilization will lead to enhance productivity of goods and services.