Japan sees first data from tax hike, and it’s not good

If there was one thing that sent more shivers running down the spines of Bank of Japan officials than Godzilla trampling on Tokyo, it was the sales tax hike implemented after much agonizing on October 1.

Their fears appear to be justified.

Early data – the Consumer Price Index in Tokyo, a leading national indicator – shows that inflation in the metropolis rose just 0.5% year-on-year. That is well short of the BOJ’s target of 2%, and also falls below a median forecast of 0.7%, Reuters reported.

As a result, Reuters noted, the BOJ may have to trim its annual inflation forecast.

Twice delayed, the sales tax raise – from 8% to 10% – was the first in five years, and previous hikes have had negative impacts.

Even so, the latest rise was deemed essential to help Tokyo raise cash, notably to pay down Japan’s ballooning public debt and also to fund public services, such as free pre-kindergarten education. The tax applies to most items, though many foodstuffs are exempt.

The central bank faces a tightening bind.

Years of ultra-loose monetary policy and near-zero interest rates have hit financial institutions but failed to lift inflation. Wages, too, have remained stagnant.

The latest numbers suggest the BOJ will have to continue with stimuli, despite the dwindling supply of ammunition in its war chest.

But there is some good news. While previous sales tax raises impacted spending, local consumer demand appears to remain strong.

And on the overseas front, there are hopes that the Beijing-Washington trade war – which is causing Tokyo’s export-heavy economy some grief – will ameliorate.