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a blog from young economists at Nova SBE

Japan’s atempt to kill two birds with one stone.

            Japanese Prime Minister Shinzo Abe is known for his economic policies, like quantitative easing, increase in infrastructure spending and the devaluation of the yen, in order to get japan back on track to economic growth. This assertive policy line is already nicknamed “Abenomics”. And his latest creation is the two step increase in japan’s sale tax.

            The tax hike will be as follows: It will increase from 5% to 8% in April 2014 and then from 8% to 10% in October 2015. This gradual increase has two objectives to reduce public debt associated to an ever growing old aged population and to stimulate consumption. The latter although it seems counter intuitive (Graph 1), higher prices to create more consumption, the secret lies in the gradual increase and in the early warning for the consumers making them aware that actual prices are relatively cheaper.

ImageGraph 1

            The tax hike doesn’t come alone.  Prime Minister Shinzo Abe has implemented a stimulus package, marked a 2% inflation goal for the Japanese Central Bank and advised corporations to increase wages and to employ more workers. This measures are a safeguard against a possible backfire of the tax hike that would create a stagnation in private consumption.

            Another important change is the end of the reduced capital gains tax period. The tax rate was set at 10% in 2003 and is due to change to 20% in the 1st of January 2014. But in order to accommodate some of the negative effects of the tax change the Japanese government are creating incentives for small investors to buy more stocks.

            The effects of both tax changes in the income and utility of capital owners and labor suppliers are differentiated in Table 1 that uses the general equilibrium model. We can observe that the capital owners will get hit by the increase of the capital gains tax that reduces their income. The labor suppliers will see an increase in both income and utility. The income effect will be supported by higher tax revenues (redistribution of taxes to labor suppliers) that in turn will create a higher utility. Finally we can observe a small level of inflation (less than 1%) that was, in fact, the objective of this policy. But like all things economical models only can take us so far. We’ll just have to wait and see.

ImageTable 1


Miguel Vian 634

Sources: (capital tax gain change)

“Intermediate Microeconomics: A Modern Approach (Eighth Edition)”- Hal R. Varian

“Introducing CGE Models to the Classroom Using EXCEL” – Amy Peng


Author: studentnovasbe

Master student in Nova Sbe

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