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Deflation urged to be vanquished before tax is raised

JIJI

Fighting deflation is more important than raising the sales tax, according to Waseda University professor Masazumi Wakatabe.

“Japan has not fully come out of the protracted deflation yet,” Wakatabe said. “The economy is only beginning to recover, driven by personal consumption,” he said, and the tax hike would dampen the very sector leading the growth.

If the government raises the sales tax to 8 percent from 5 percent next April as currently planned, the economy will decelerate, making it hard to carry out the second hike to 10 percent slated for October 2015, he said.

Wakatabe noted that many private think tanks are forecasting that the economy will shrink during April-June 2014 if the tax is increased to 8 percent.

The Finance Ministry and the Cabinet Office deny that the economy’s downturn in 1997 stemmed mainly from a rise in the tax from 3 percent to 5 percent that April, Wakatabe said.

They both claim the weak economy was due to unpredictable factors, such as the Asian financial crisis and Japanese bank industry woes, but uncertainties over Europe and emerging economies are strong now, he said.

Wakatabe added that he can’t say the current risk factors are less serious than in 1997.

A recent Cabinet Office report says Japan will achieve fiscal consolidation targets through a natural increase in tax revenue that would result from annual economic growth of 2 percent in real terms and 3 percent in nominal terms, as well as a tax revenue gain attributed to the planned two-stage consumption tax rise, he said.

But nominal growth would reach 4 percent if Japan realizes the 2 percent inflation target as agreed on between the government and the Bank of Japan, Wakatabe said.

If Prime Minister Shinzo Abe’s economic policy package is fully implemented and 4 percent growth is achieved, revenue from corporate, income and other taxes will expand steadily, he said, urging that new long-term tax and spending reform steps be worked out by calculating the anticipated stable tax revenue growth.