On April 1 the Japanese government raised consumption tax from 5% to 8%, which means consumers have to pay an additional 300 yen (about 2.9 USD) for every 10,000 yen (96.8 USD) they spend on everyday products.

The government has been cautious about raising the consumption tax. Several cabinets have lost public support because their policies of tax increases led to economic contraction. Currently, due to its severe fiscal deficit and heavy debt, raising taxes is the only short-term option that might allow the Japanese government to resolve the problem.

Statistics suggest that Japan’s fiscal revenue will increase by 6 trillion yen (about 58 billion USD) after the consumption tax is increased. Last October the Abe cabinet persisted in raising consumption tax despite opposition from the public, thus putting the development of Japan’s economy under pressure. But far from easing off on the policy, the Abe cabinet now plans to raise the rate to 10% in 2015. In the fourth quarter of 2013, Japan’s economic growth began to slow down. The rate was firstly estimated 1% and then was revised down to 0.7%, below market expectations.

The negative impact of the consumption tax increase on Japan’s economy should not be underestimated. The first impact will be felt on the consumer market. Tax increases have a lasting negative psychological impact on consumers, which will be reflected directly in consumption figures. A market downturn will soon affect production, reducing operational activity and profits, and increasing inventories. Therefore economists and experts estimate that economic growth in the second quarter will experience a further sharp reverse, and will not recover in the third quarter. This year’s growth rate may be under 1%.

The Japanese government envisages several measures to confront the difficulties resulting from the tax increase. However, it is widely thought in Japan that the effects of these measures are limited, because there is little room for quantitative easing and wage increases are already small. As the Japanese media have warned, the Abe cabinet is facing a most serious test, and this consumption tax increase might drag Japan’s economy to the very bottom.

The article is edited and translated from《日本经济或被消费税拉入低谷》, source: Economic Daily, author: Yan Haifang.