Prime Minister Shinzo Abe, now sitting on the biggest legislative majority in six years, faces the threat of political dissent within months as a planned hike in the sales tax threatens to arrest an economic rebound.
The world's third-largest economy has 30 percent odds of tipping into its fourth recession since 2008 should Abe bump the consumption levy to 8 percent in April from 5 percent, according to the median of 23 estimates in a Bloomberg News survey. He'll need a ¥5 trillion ($50 billion) fiscal package to cushion the impact of the increase, the survey said.
Deteriorating growth would counter Abe's promise to revive Japan from two decades of economic malaise, which swept his Liberal Democratic Party to power in December and won it a majority in the Upper House this month amid the third-lowest voter turnout ever. At the same time, failing to implement the tax boost risks undermining confidence in Abe's pledges to rein in the world's largest debt burden.
"The market would raise a question mark about Abenomics if the economy fell into a recession after raising the sales tax," said Yoshimasa Maruyama, chief economist at trading company Itochu Corp. in Tokyo. "Members of Abe's ruling party will request extra spending — especially people who represent sectors that will be badly affected by deregulation and the TPP."
Abe, 58, has already sown division in the ruling party with promises of structural reforms that include joining the U.S.-led Trans Pacific Partnership trade talks.