Japan Press Weekly

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2016 April 13 - 19 [ECONOMY]

Steep rise in Engel’s coefficient indicates quality of living crisis

Japan’s Engel coefficient, the percentage of household’s food expense to its total consumption expense, increased by 1 point in 2015 from the previous year. This index was influenced by the fact that the government headed by Prime Minister Abe Shinzo forcibly raised the consumption tax rate to 8% in April 2014.

The Engel coefficient tends to increase after a consumption tax is introduced or its rate is hiked; if household income fails to increase in accordance with a rise in prices caused by a tax hike, people have to reduce living expenses but need to maintain a certain level of food expenses. The 2015 increase in the Engel coefficient is greater than in past cases.

The consumption tax was introduced in 1989. The initial tax rate stood at 3%. In FY1989, the prices rose by 2.9% from the previous year. Despite this, the food expense ratio declined by 0.1 point from 25.4 to 25.3 in that year. This may be because at that time, real income was higher than it is now.

In FY1997 when the consumption tax rate was hiked from 3% to 5%, prices went up by 2.2% and the Engel index accordingly went up by 0.2 point from a year earlier.

After the consumption tax hike to 8% was implemented in April 2014, the Engel coefficient increase reached 0.7 point, much higher than in 1989 and 1997. One of the possible reasons for this is a considerable increase in prices for all goods and services. The prices went up by 3.5% in FY2014 from the previous year. In addition to the tax hike, Abenomics’ easy money policy has contributed to pushing up the prices.

Another reason is the decline in real wages. The average monthly income per worker household peaked at 572,977 yen in 1997. It fell by 71,799 yen to 502,178 yen in 2014. Furthermore, a rise in premiums for pension and other social insurance and cuts in welfare services led to less disposable income. People had to spend less on services and commodities except food expenses, leading to a higher Engel coefficient.

The latest steep rise indicates a crisis in people’s livelihoods. Turning a blind eye to this, the Abe government plans to raise the consumption tax rate to 10% in April in 2017. This will push people’s lives into a deeper crisis.

Past related article:
> Drop in consumer spending is more serious than at time of 1997 tax hike [July 30, 2014]