TOKYO -- Abenomics, the pet name for Japan's economic revival, has worked magic on the yen, boosting the country's carmakers.
But now the other shoe is about to fall: Tax hikes.
This week Prime Minister Shinzo Abe said he will raise Japan's sales tax to 8 percent, from 5 percent, in April. The move will likely further depress an already moribund domestic auto market.
Annual auto sales in Japan could drop by 580,000 units to as low as 4.03 million vehicles and 170,000 jobs could be lost, if the tax is enacted without any offsets, the Japan Automobile Manufacturers Association has predicted.
Yet carmakers are already reeling.
The upheaval underscores the pressures pushing Japan's automakers to invest less at home, where sales are frail, and build up overseas in places such as North America.
Toyota Motor Corp., Japan Inc.'s flagship, lowered its domestic production target on the news, expecting local sales to drop after the tax hike hits, the Nikkei newspaper reported.
The new plan trims about 350,000 units, for a revised output target around 3 million units, the business daily said. It has already notified suppliers about the cutback, it added.
Suppliers are bracing for the squeeze.
The Nikkei reports that small suppliers will be allowed to collaborate to ensure that their sales prices reflect the tax hikes being passed on to customers. They won't be allowed to discuss specific product pricing, but they can discuss such things as rounding off fractions and submit joint applications for their pricing strategies to Japan's Fair Trade Commission.
This, without a hint of irony, comes just a week after the U.S. Department of Justice nailed several big Japanese auto suppliers for price fixing and bid rigging in the United States.
Meanwhile, as part of a wider tax revamp, the Japanese government is considering changes that would raise taxes on luxury cars and the tiny minicars that are peculiar to the Japanese market and have long enjoyed preferable tax rates.
The new vehicle tax method would be based partly on fuel economy, and not just engine displacement.
What's worse, the sales tax is set for another increase to 10 percent, from 8 percent, in October 15.
To be sure, Abenomics was a boon to Japan's auto industry when it reversed the yen's export-killing rise against the dollar and other currencies. That was a big hit with carmakers here.
Furthermore, auto sales should experience a big boom right before the sales tax hikes kick in. (And a big bust thereafter.)
The government also aims to soften the blow on automakers, possibly by repealing Japan's onerous auto acquisition tax, which is levied on top of the sales tax when you buy a car.
But that rollback could be two years off, and it would essentially be a zero-sum game for automakers, at best. That tax is 5 percent of the price of a new or used car. The overall sales tax increase, meanwhile, would be a five-point surge.
The bigger risk is that raising taxes could deepen Japan's economic slowdown, further cutting into auto demand.
Japan's automakers may well find it tougher to navigate Japan's changing tax landscape. And the short-term impact of high taxes will likely be erratic, and then suppressed, auto sales.
Little wonder Japan's automakers take a dim view of plowing money into new factories at home. In an age of build-where-they-buy, Japan Inc. doesn't have the backyard sales to justify it.
And Abenomics is a double-edged sword on that count.