Business Times - 17 Aug 2009

Japan's green subsidies erode savings, threaten spending

Tax breaks lure consumers to dip into savings for purchases

(TOKYO) The splurge spurred by Japanese subsidies on energy-efficient cars and electronics risks depleting household savings so much that many consumers will have to cut spending next year, which may help push the economy into a double-dip.

The savings rate has already started coming down from 27 per cent of disposable incomes at the start of the year as consumers lured by tax breaks and eco purchase points dip into savings to buy hybrid cars and flat panel TVs.

This temporary boost to consumption probably helped Japan's economy grow for the first time in five quarters in the April-June period, according to a survey before the release of the data on Aug. 17. The household savings rate is likely to fall to as low as 15 per cent this year, according to Dai-Ichi Life Research Institute, as consumers front-load their purchases before the subsidies expire in March 2010.

Savings would then be so low that shoppers will lack the ammunition to spend much more, economists say.

'Incomes are low, so when you use subsidies to support consumption, the only choice is for the savings rate to fall,' said Toshihiro Nagahama, an economist at Dai-Ichi Life Research Institute. The Democratic Party, which stands a good chance of seizing power from the ruling Liberal Democrats in elections later this month, has pledged to boost disposable incomes of Japanese families. But economists doubt it can cut enough wasteful spending to finance all the handouts they have promised. Should the Democratic Party fail to deliver, personal consumption, which accounts for about 60 per cent of gross domestic product, could stagnate.

'Looking at past recessions, the savings rate tends to bottom out around 15 per cent, and this level may discourage consumers from spending further,' Dai-Ichi's Nagahama said.

The current government said in April that for a limited time it would pay as much as 250,000 yen (S$3,800) for each purchase of a low-emission car, part of Japan's largest-ever economic stimulus package. The scheme also allows consumers to use 5 per cent of the purchase value of energy-efficient electronics as vouchers that can be exchanged for other goods.

So far the measures have been a big splash. Sales of Toyota Motor Corp's Prius hybrid car surged 25 per cent in July from the previous month, making it the best selling car in Japan for a second consecutive month.

The sales volume of flat panel TVs, which can earn consumers vouchers if they consume less energy, rose 58 per cent in July from a year earlier, according to research firm GfK Marketing Services. That compares with a 29 per cent annual gain in March, the month before the government announced the scheme.

However, as wages and bonuses keep falling at record rates this year the shopping spree eats into Japanese consumers' savings.

Once eco subsidies and tax breaks expire, consumer spending could weaken again and contribute to another decline in gross domestic product.

The potential loss to GDP is significant. Should consumer spending fall 1 per cent, that could subtract around 0.6 percentage point from GDP, according to Takahide Kiuchi, chief economist at Nomura Securities.

'There's a good chance gross domestic product will contract again in the first quarter of next year,' Mr Kiuchi said. 'Consumption is on a high, but excluding government policies, it's not really rising. Salaries are falling at an alarming rate and companies will continue to cut personnel costs.' Japan's economy could shrink by 0.4 percent in January-March 2010 from the previous quarter, while the savings rate could plunge in July-September this year, he said. - Reuters