Why Shinzo Abe could nix tax hike two For clues as to why Japan's prime minister seems very keen to avoid another consumption tax increase so soon after the last, you could look at a whole host of economic indicators - third-quarter GDP, consumer confidence surveys, industrial production or housing starts. Or you could just examine charts put together by Tsutomu Watanabe, a Tokyo University professor who has spent much of the past six years poring over point-of-sales data from supermarkets. A glance at his UTokyo Daily Price Indices suggests that the April 2014 tax hike - from 5 per cent to 8 per cent - has had just as chilling an effect on consumer demand as the last one, in April 1997. Back then, when Japan lifted the tax from 3 per cent to 5 per cent, the economy was in recession within a year, with weakness exacerbated by implosions in Japan's banking sector and the effects of the regional currency crisis. Deflation took a grip not long after that. As government officials pushed for this year's increase, they swore that the same thing could not happen again. Not only was Asia in a much better state, they said, but the Bank of Japan was pumping unprecedented amounts of liquidity and the finance ministry was easing the extra burden on households through the biggest fiscal stimulus package it could muster. But according to Prof Watanabe's crunching of daily price data - gathered from scans of hundreds of thousands of taxable items sold at about 300 supermarkets around the country,and collected by a unit of Nikkei Inc, the publishing firm - there are still strong similarities in the apparent effects of the hikes of "97 and "14. The two indices show the same basic pattern: a confident pass-through of the full tax (and then some) in early April, an instant snap-back, then a patchy recovery which peters out by early June. Thereafter, prices are falling, year-on-year. The "97 tax increase was recognised as a big failure but the two lines are more or less the same," says Prof Watanabe, a former BoJ official with a Harvard doctorate in economics. Within a few months, "prices started to decline and decline and decline." There are some big differences between the UTokyo index and the official government CPI basket, which shows a steady fall in underlying inflation - excluding taxes - from 1.5 per cent in April to 1.0 per cent in September. While the government tracks the price of one particular brand of shampoo, for example, the UTokyo tracks an average of about 300 brands, weighed by volume. That means it has probably had more of a downward bias than the official index in the wake of the tax increases, as it captures the effects of consumers trading down to cheaper brands. Another important difference is that the UTokyo index includes no services or consumer durables. As such, says Prof Watanabe, it probably bears little relation to inflation expectations, which tend to show up in the price of a haircut, say, or an hour's rental of a karaoke booth. That is the variable that BoJ governor Haruhiko Kuroda has been most keen to influence, he notes, by stressing his determination to hit a 2 per cent rate of inflation. Even so, as supermarket managers can adjust prices instantly, it is probably a better snapshot of real-time gaps between supply and demand. And it could also signal falls ahead for the roughly 20 per cent of the official CPI basket which tracks groceries. In 1997 retailers cut prices for one-off promotions but as tough times continued, they made more permanent adjustments from November. So far this month there's been no big lurch downwards, but declines could be in the offing, says Prof Watanabe. My guess is that something similar could happen this year.