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Abe trying to strike a delicate balance

Restoring fiscal health can't come at expense of economic growth

by Shinya Ajima

Kyodo

When Prime Minister Shinzo Abe met the news media after deciding to raise the consumption tax next April, he stressed that his administration can pursue economic growth and fiscal discipline at the same time.

The declaration Tuesday, which almost sounded as if he was reassuring himself, betrays the fact that the decision to increase the tax to 8 percent from the current 5 percent to cover swelling welfare costs was a tough call.

“There is no other way for us than achieving economic revival and fiscal restoration at the same time,” Abe said.

One benefit for the prime minister is that the tax hike may shield Japan from international scrutiny over its fiscal health, the worst among major developed countries.

Abe had previously shown reluctance to proceed with the tax hike, which was passed by the Diet in August 2012, when his Liberal Democratic Party was part of the opposition and he was not yet the head of the party, although the LDP endorsed the hike.

By going ahead with the planned hike, Abe can avoid conflict with LDP heavyweights who urge fiscal discipline, such as Taro Aso, a former prime minister and current finance minister, and Justice Minister Sadakazu Tanigaki, who headed the party when the tax hike was passed by the Diet.

If Abe had changed the plan stipulated under the law, it would have cost him “much political energy,” a source close to him said, referring to the possible lengthy process of legal revision as well as work to ease complaints among fiscal conservatives.

Economists had also warned it would have risked investor confidence in Japanese government bonds.

Raising the tax as planned, however, doesn’t guarantee Abe can make the whole show work.

The higher consumption tax could hurt business and household sentiment — and nip the economic recovery prompted by “Abenomics” in the bud.

Indeed, officials in the prime minister’s office acknowledged that Abe has been struggling to ensure the tax hike will not slow growth significantly, amid fears such a development could damage voter confidence in the LDP-led ruling coalition that returned to power in the December Lower House election and strengthened its grip via a win in the July Upper House poll.

“No way. It would be all our fault,” Abe was once quoted by an aide as telling a staff meeting in response to another aide saying that even if he fails with the tax hike, he would be able to shift blame to the previous administration led by the Democratic Party of Japan.

In any case, Abe is hardly out of the woods as far as the sales tax is concerned. The law provides for a two-stage hike, with the second step scheduled for October 2015, when it is to be raised to 10 percent.