In what appeared to be a veiled warning, one of Prime Minister Shinzo Abe’s most influential economic advisers has said he “doesn’t have to rush” into the first stage of the sales tax hike unless the economy and the labor market have recovered.
The Abe administration plans to make its final judgment on whether to proceed with the tax hike, which will raise the rate to 8 percent from 5 percent next April, this autumn. Adviser Koichi Hamada’s hint, however, could affect Abe’s decision.
If the consumption tax is hiked before the economy has recovered, tax revenue will dry up, the 77-year-old professor emeritus of economics at Yale University said Wednesday, hinting that the Japanese economy might shrink after the hike.
“It would be advisable (to do it) if the Japanese economy shows signs of improving to the same level as before 2008, when it was relatively good, and worries disappear,” he said in an interview.
Hamada hinted that sales tax hikes will be inevitable in the long run to restore Japan’s fiscal health, which is the worst among the industrialized nations.
The tax rate is to rise again, to 10 percent, in October 2015.
Legislation enacted last August stipulates that the government should shoot for nominal growth of around 3 percent and real growth of about 2 percent before raising taxes. But the target is nonbinding.
The economy expanded at an annual rate of 4.1 percent in the first quarter in inflation-adjusted terms, completing two consecutive quarters of growth.
Although the BOJ can’t achieve its 2 percent inflation target within two years, its leadership “does not have to take responsibility” if full employment is almost attained and the economy is on a growth path, he said.
Hamada, who has been advising Abe since the Cabinet was formed on Dec. 26, advocates using a reflationary approach to economic recovery by pushing up prices via monetary easing.
The foundation of Abe’s economic strategies, dubbed “Abenomics,” is largely influenced by Hamada’s views.