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Abe to raise sales tax to 8% as scheduled

More stimulus in works but critics fear hike will hobble recovery

Kyodo

Prime Minister Shinzo Abe has decided to raise the consumption tax rate to 8 percent next April as planned, emphasizing the need to demonstrate fiscal discipline by making good on a pledge to the international community, a source close to him said Thursday.

Abe, who has been trying to shake the economy out of nearly two decades of deflation, is also considering implementing a stimulus package worth ¥5 trillion to prevent the tax hike from slowing down the economy, the source said.

A series of indicators, including revised April-June gross domestic product data released Monday, indicate the economy is steadily reinflating, while the success of Tokyo’s bid to host the 2020 Summer Olympics has also sparked hope that growth may gain momentum through the expected boom in construction and other sectors.

It will be the first increase in the consumption tax since it was raised to 5 percent in April 1997. The tax was introduced in 1989 at an initial rate of 3 percent.

Increasing the sales tax is widely regarded as a key to Japan’s fiscal rehabilitation. The nation’s fiscal health is the worst among the major developed economies, with public debt at more than 200 percent of GDP.

Abe’s administration has committed internationally to halving the ratio of the primary balance deficit to GDP by fiscal 2015, from the level in fiscal 2010. A deficit in the balance means the country cannot finance government spending other than debt-servicing costs without issuing new bonds.

The government has also promised to turn the primary balance into a surplus by fiscal 2020. However, the latest estimate by the Cabinet Office indicates the nation cannot accomplish this even if the consumption tax hikes are carried out and the economy stays on a steady growth path.

Any delay in the tax hike would harm the credibility of Japanese government bonds and prompt global market participants to let go of them, many analysts have said.

Bond prices move inversely to interest rates. If a bond sell-off accelerates, it would trigger a surge in long-term interest rates, which could hurt domestic demand with mortgage rates and corporate borrowing costs ballooning, they said.

Some government officials, however, have asked Abe to delay the hike or raise it by a smaller amount to start off, arguing that an increase of 3 percentage points could thwart his efforts toward reflation.

  • japanish

    There’s that miniscule rise in the minimum wage devoured so! Enjoy paying for the the Olympics, suckers!

  • YoDude12

    NOTHING LESS THAN THEFT!
    Take money from those that struggle to pay their bills due to higher taxes.
    Give it to your buddies at TEPCO in the form of stimulus.
    Absolutely, theft.

  • Guest

    And that’s how you get the Japanese Tax payers to finance repairs to TEPCO’s Fukushima nuclear power plant and the work needed to get the Olympic sites ready for 2020, The 5% consumption tax was created in 1991 to finance Japan’s contribution to the first Gulf War. The war ended but, of course, the tax stayed. And no one said anything…20 years later, the tax is still here. I guess it had to stay so that Japan could continue to help finance subsequent wars. Now the tax is raised to 8%. And, still, no one says anything…You have to admire the patience and endurance capacity of the Japanese people. Anywhere else, there would have already been hundreds of thousands of demonstrators in the streets. Look at how people in Brazil reacted to the country organizing the next soccer World Cup and Summer Olympics… And this is a soccer crazy country…

  • JTCommentor

    “Increasing the sales tax is widely regarded as a key to Japan’s fiscal rehabilitation”
    I just dont see how that is true. I dont know anything about tax, but surely increasing personal income tax would have a greater impact on the economy than raising the consumption tax. With the rise in consumption tax, for every dollar people put in the bank and instead of spending, theyve saved the 3% additional tax. If the revenue is raised instead through personal income tax, then the tax has already been paid regardless, so there is less disincentive to save (which the Japanese are so good at doing already). In this case, increasing the comsumption tax seems to lower the amount of money people are putting back into the economy.

    To go even a step further, Abe is considering reducing the corporate tax rate, in the hope that maybe the corporations will use some of their tax saving to pay workers more. Thats a lot of faith put into corporations. Why not just get straight to the point and tax the workers less, and let the newly invigorated corporations pay their fair share?

  • EQ

    And this is how you get the Tax Payers to finance repairs to TEPCO’s damaged Fukushima nuclear power plant and the work needed to get the Olympic sites ready for 2020…The 5% tax was implemented in 1991 to finance Japan’s help in the first Gulf War. The war ended but, of course, the tax stayed. No one said anything. 20 years later, the tax is still here. Not only is it still here but it’s going to be increased to 8%. And, still, no one says anything…You just have to admire the Japanese people’s capacity for patience and endurance. Or is it a sense of duty? I’m just a simple person with no studies in economics. So someone please explain to me how raising the tax to 8% at a time when common people struggle to make ends meet, can’t afford to buy new houses and new cars, and will inevitably tighten their belts to save more in order to buy less, will help the Japanese economy? If buying less means less demand which should generate loss of jobs, then how exactly will a stimulus (in other words – more Tax Payers’ money) improve the economy? I mean – the economy should slow, shouldn’t it, because of reduction in consumption. So the stimulus will, at best, keep the economy running at that new slow level…until the consumption tax is increased again to make up for the loss incurred from raising the tax to 8% in the first place?

  • japanish

    At the general comments about how they can’t understand the logic behind raising tax to “stimulate” the economy. Abenomics is not about stimulating the economy. The economy is beyond stimulating (unless vast deposits of oil are discovered in Japan or somesuch). I think the authorities have accepted the inevitability that Japan’s economy is in terminal decline: The population decline is simply beyond fixing at this point.
    IMO This is analogous to just before the “fixing” of social castes at the beginning of the Edo period. Abenomics is ensuring that the share of the wealth is fixed in the hands of the hereditary political/business elite as the vast majority of Japanese will see their standard of living plummet and the value of their savings will vanish. They will be reduced to feudal status.