Tax hike, global slowdown set to dent Japan's economic growth in 2020

Japan's economic growth is expected to slow modestly in 2020, as a consumption tax hike combined with a sluggish global economy are poised to drag on flagging consumer spending and exports.
The government's 26 trillion yen ($237 billion) stimulus package and Tokyo Olympics and Paralympics-linked spending by tourists will serve to underpin the world's third-largest economy, economists said.
Japan's real gross domestic product is projected to grow 0.49 percent in fiscal 2020 starting in April, according to the average estimate of 35 private-sector economists in the Japan Center for Economic Research's ESP Forecast.
Growth will be at its second-worst level in six years, following on fiscal 2019's 0.87 percent result which was the largest expansion in three years.
The U.S. presidential election could curb growth even deeper if President Donald Trump chooses to step up his protectionist "America First" economic policies toward the November poll, economists said.
"To turn the Japanese economy from slowdown to acceleration, it is necessary for the negative impact of the tax hike to dissipate or for external demand to clearly rebound," Shunsuke Kobayashi, a senior economist at the Daiwa Institute of Research, said.
Some economic data already signal the increase in consumption tax, from 8 percent to 10 percent on Oct. 1 last year, is cutting into private consumption.
Household spending in October marked the first year-on-year fall in 11 months, while retail sales in the same month posted the largest year-on-year drop in more than four years.
The hike is expected to increase households' tax burden by around 2 trillion in fiscal 2020, even taking into account the government's shopping reward point program for cashless purchases introduced to mitigate the higher tax impact, said Kobayashi.
"The tax increase will come on top of an expected pause in improvement in the labor market. That means the economy will be in a lull," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co.
Exports, a key growth engine of Japan's economy, are expected to remain subdued after falling for the 12th consecutive month through November 2019, reflecting a slowdown in the global economy including a drop in shipments of auto parts and chip-making equipment to China, the largest buyer of Japanese products.
China is reeling from trade disputes with the United States and its economic outlook remains uncertain with the recent agreement on the terms of a "phase-one" deal guaranteeing no immediate settlement of the trade spat.
Trump's persistent call for reduced trade deficits with Japan also provides little hope that exports to the U.S. will increase.
Demand for electronic parts for 5G wireless network services is picking up in some markets. Still, the trade row between the world's two biggest economies leaves the global economy on shaky footing and with few opportunities for weak exports to rebound sharply, economists said.
The disputes prompted the Organization for Economic Cooperation and Development to lower its forecast for global economic growth in 2020 to 2.9 percent, flat from 2019.
The OECD warned 2020 growth could be weaker, citing uncertainties over the impact of the United Kingdom's departure from the European Union and the failure of stimulus steps to prevent a sharper slowdown in China.
"A slowdown in the global economy and (Japan's) slumping exports will both serve as major negative effects on Japan's GDP," Daiwa's Kobayashi said.
All the downward pressure at home and from overseas will be partially softened by the economic package outlined in December. The plan includes a boost to public spending on infrastructure in the wake of major natural disasters and rebate program for cashless payments that the government hopes will spur consumption.
The government expects the stimulus measures to boost Japan's GDP by around 1.4 percent in the three years to fiscal 2021.
The Tokyo Olympics and Paralympics from July 24 through Sept 6 are expected to produce an economic impact of 747.5 billion yen, according to a report released by SMBC Nikko Securities Inc. The event is expected to bring significant spending by foreign visitors and purchases of products like new televisions.
But economists are concerned that economic activity will recede when the one-off demand for Tokyo Games infrastructure fades.
Junichi Makino, chief economist at SMBC Nikko Securities, said calls for additional stimulus steps may grow in the latter half of the year if Prime Minister Shinzo Abe considers dissolving the House of Representatives for a snap election after the Olympics.
The U.S. presidential election adds further uncertainty to that nation's economic policy settings and the spillover effects on the world economy.
"Attention will be paid to what economic policies President Trump and Democratic candidates talk about" during their election campaigns, said Toshihiro Nagahama, executive chief economist at Dai-Ichi Life Research Institute.
Among Democratic candidates, Elizabeth Warren is worth paying special attention, as the former Harvard University professor has pledged to increase taxes on the wealthy and strengthen corporate regulation, policies that could slow U.S. growth, he said.

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