Prime Minister Shinzo Abe’s long-awaited decision this week on whether to go ahead with the first stage of doubling the sales tax is a major political gamble that proved career-ending for his predecessors, analysts say.
Since sweeping December elections on a ticket to kick-start the world’s third-largest economy, the prime minister launched an unprecedented policy blitz — dubbed “Abenomics” — that appears to be taking hold as the economy expands and the stock market roars.
Abe underscored that early success with an upbeat speech to the New York Stock Exchange last week, calling for investors to get on board with his bid to regain Japan’s one-time economic glory.
“Japan, as the third-largest economic powerhouse on the planet, will be back in full force again,” he promised.
But his decision on hiking the tax levy, seen as crucial to chopping Japan’s massive national debt, threatens to sink Abe’s growth plans and subsequently his popularity.
Few, however, see the 59-year-old as having much choice, given the size of the national debt, proportionately the worst among the world’s richest nations at more than twice the size of the economy.
The International Monetary Fund, among others, has been calling on Tokyo to fix its books, after credit rating agencies lowered their ratings on Japan.
“This is Abe’s biggest political decision since he took office,” said Tomoaki Iwai, professor of politics at Nihon University in Tokyo.
“Japan is in the middle of an epic experiment and his decision is a crucial test of Abenomics.”
Speculation has been building ahead of Tuesday’s announcement, which will come after the Bank of Japan publishes its “tankan” business confidence survey.
Some expect the closely watched survey to hit a three-year high, possibly providing the tipping point for the prime minister to give the green light to adopt the tax increase his party was first to propose and that was passed by the administration he booted out of office.
Abe has officially been undecided for months on whether to go through with the first stage of the tax hike to 8.0 percent from the current 5.0 percent in April. The second stage, which will hike it to 10 percent by 2015, is written into legislation, but with similar caveats.
“Considering the level of Japan’s national debt, I would say the sales tax hike is inevitable,” said Yoko Takeda, chief economist with Mitsubishi Research Institute, who was among 60 prominent economists and business leaders invited to brief Abe on the pros and cons of a tax increase.
“If Japan failed to take action now, it would lose its trust with the world,” she said.
Economists estimate the tax hike will have an estimated impact of about ¥8 trillion on households, raising fears it will come down like a hammer blow on consumer confidence just as parts of the economy are showing signs of picking up.
To soften the impact, Abe is expected to unveil a one-time $50 billion stimulus package with payouts for the poor and corporate incentives to boost investment.
In the meantime, his team is bargaining with big business to cut to the corporate tax rate in exchange for wage hikes, although the timeline for such a move remains unclear.
Despite securing his power base in July Upper House election — which gives him at least three years’ time before the next election — historical precedents are not good for leaders who force consumers to shell out more.
Two months after then-Prime Minister Noboru Takeshita ushered in Japan’s first-ever sales tax — a modest 3.0 percent — in April 1989, he was forced to resign amid opposition to the levy as well as a corruption scandal. His successor was then defeated in national elections.
Ryutaro Hashimoto quit as prime minister after his party lost 1998 elections by a landslide after he oversaw the sales tax hike to 5.0 percent a year earlier.
The increase was widely blamed for helping snuff out a fledgling economic recovery.
But ultimately, Abe’s biggest challenge may be convincing Japan’s thrifty corporate sector to help with the long-running battle against deflation by hiking wages, seen as key to convincing the public to open their wallets at a time when he’s trying to stoke 2 percent inflation.
The prime minister has called on Japan Inc. to do just that, but few seem to be biting.
“If Abe fails to persuade companies to raise wages, the risks of entering another deep phase of deflation will increase,” said Yoshikiyo Shimamine, executive chief economist at Dai-ichi Life Research Institute.
“Japan’s economy is approaching a critical stage.”