Monday’s upward revision of Japan’s real gross domestic product is yet another favorable signal for the administration to raise the consumption tax as scheduled next April.
The economy grew at an annualized rate of 3.8 percent in the three months through June in inflation-adjusted terms, up sharply from the preliminary data, as business investment received an upward tweak, the government said.
But one claim that remains the core argument for opposing the tax hike is the lack of growth in tax income since 1997, when the consumption levy was last raised, from 3 percent to 5 percent.
Touching on the precedent, experts, including Prime Minister Shinzo Abe’s economic adviser, Koichi Hamada, continue to warn the government may see tax revenue decline instead of rise if the public is slapped with a higher burden, especially at a time of stagnant wages and rising prices, especially imports, like food and fossil fuels.
A recession kicked in almost immediately in April 1997 after the first sales tax hike, and the late Prime Minister Ryutaro Hashimoto, who administered the raise, was blamed for stifling a desperately needed recovery.
The tax income had grown for the fourth consecutive year until 1997, when it reached ¥53.9 trillion, according to the Finance Ministry. But after the tax was raised, that number fell sharply to ¥49.4 trillion in 1998.
Quarterly GDP growth after the 1997 tax hike recorded a 3.7 percent drop. Sales of housing and automobiles dived and choked future economic growth, some point out.
Despite the government claiming that raising the sales tax by 1 point generates an estimated ¥2.5 trillion in revenue, to this day it has yet to bounce back to the mark of ¥53.9 trillion set in 1997. Tax income for fiscal 2013 is forecast at ¥43.1 trillion.
The great debate over whether the consumption tax hike ruined Japan’s economic recovery in the late 1990s is still ongoing, and was one of the key topics when Prime Minister Abe summoned a panel to discuss it late last month.
Hamada and those who share his opinion have called for a more gradual approach to curtail the hike’s impact on the economy, including raising the tax by 1 point annually instead of 3 points next April and another 2 points in 2015.
Those pushing for the levy to be raised, however, claim the recession that started in 1997 was mainly caused by other factors, including the Asian financial crisis, rather than the tax hike.
In addition to the economic meltdown in Asia, a number of momentous events impacted Japan’s economy around that time, including the failure of Hokkaido Takushoku Bank in 1997 and the bankruptcy of Yamaichi Securities Co. the following year.
A report that University of Tokyo professors Hiroshi Yoshikawa and Hiroshi Ibori submitted last year to the government’s council on social security reforms emphasized that the tax increase was “not the main cause of (the 1997) recession.”
According to the book “Shohizei ga Nihon wo Sukuu” (“Consumption Tax Will Save Japan”) by economist Mitsumaru Kumagai, a study of 67 sales tax hikes in Europe since 1980 also showed that the impact on growth is “limited” when a country decides to add the levy.
“Circumstances were different in 1997, when external factors played a role in slowing down the domestic economy,” Tsutomu Saito, an economist at Daiwa Institute of Research, told The Japan Times Monday.
Saito pointed out that there are no signs of an economic emergency similar to the 1997 Asian financial crisis taking place anytime soon, and that the domestic economy appears to be more stable as well.
The 1997 hike did cause a slump, but it also provided an opportunity for the government to learn from its mistakes, he added.
For example, in regard to the drop in consumer spending, including in housing investment and durable goods, which was evident after the 1997 tax hike, Abe can and should come up with appropriate policies to prevent a sharp drop that could hinder the economy, Saito said.
Spending on public works is expected to wane as rebuilding efforts in the Tohoku region progress. This presents a similar issue to 1997, when the government was beginning to trim spending on recovery from the 1995 Great Hanshin Earthquake.
DIR’s Saito pointed out that a combination of high taxation and reduced spending may cause trouble. But Tokyo’s selection for the 2020 Olympics is a good reason to avoid that and for the government to continue compiling budgets for construction projects.
Add the ¥1 quadrillion in government debt and the aging population causing the cost of social security to grow, and many agree that there is no reason to step away from a tax hike now.
Economic revitalization minister Akira Amari has repeated that unless an emergency similar to the 2008 Lehman Shock takes place, not raising the consumption tax “is not an option.”
DIR’s Saito agreed, saying Japan’s soaring debt is a topic that must be addressed urgently. Turning a blind eye at this point will only damage Japan’s international credibility, he warned.
On Monday, Amari said in a speech in Tokyo that Abe will make a final decision on the tax hike on Oct. 1, the same day the Bank of Japan will release its key economic indicator, the “tankan” quarterly business-sentiment survey. If Abe approves the tax hike, he will be expected to announce measures to prevent the economy from worsening, Amari added.