April 25,2014,10:00 JST

VAT hike fully transferred in April

VAT hike fully transferred in April

According to the preliminary Tokyo CPI report, consumer price in Tokyo rose by 2.9% year on year in April, a 1.6% points jump from 1.3% YoY in March. CPI excluding fresh food rose by 2.7% YoY in March, a similar 1.7% points jump from 1.0% YoY in March.

The VAT hike in April was expected to push up the price in April by 1.7% points if the tax hike was fully transferred and the result shows that was exactly what happened. The VAT rate rose by 3% points from 5% to 8%, but its effect on the overall CPI is smaller, as VAT is not levied on certain items such as rent and healthcare. In addition, for April, some of the utility charges were paid using VAT rate as they are considered as delayed charge from previous months.

There are some divergences in inflation across items. It seems that price rise seems to be faster for previously deflationary items such as household utensils and apparel goods. In April Tokyo CPI, household utensils rose by 3.1% YoY, and apparel goods rose by 4.1% YoY.

What does the result say about consumer sentiments?

The fact that retailers decided to fully transfer the effects of VAT hike means that retailers are judging that consumers will not be overly deterred by the price hike. According to anecdotal evidences of consumer behaviors in April, that indeed seems to be the case.

Policy implications

Policy makers will regard the results as a positive sign that Abenomics is working as intended. If the consumer sentiment manages to remain resilient despite the VAT hike, the downside risk to the Japanese economy will be limited, requiring no additional stimulus. The BoJ will regard the news from Tokyo CPI as one of the evidence that the Japanese economy does not require additional easing in the immediate future.