A top government official said Prime Minister Shinzo Abe should delay a planned consumption tax increase, the strongest sign yet that economic weakness is causing concern among those close to Abe ahead of his final decision on the levy.
“I think it should be delayed” by 1½ years to April 2017, the prominent official told a small group of people in a recent conversation on condition of anonymity. He expressed concern that raising the national sales tax too soon after a damaging hike in April could derail an economic recovery.
Powerful interests like the Finance Ministry, the Bank of Japan and major companies want Abe to raise the tax as planned in October 2015 to keep Japan’s pledge to reduce the biggest debt burden in the developed world. But the economic and political environment is making it harder for Abe to make unpopular policy choices.
A recovery in the world’s No. 3 economy is stalling, Abe’s popularity has taken a hit with two of his fresh Cabinet ministers resigning over scandals, the U.S. Treasury Department is pushing Tokyo not to go too fast on budget-balancing, and Abe’s ruling Liberal Democratic Party faces tough local elections next April.
An 18-month delay in increasing the sales tax rate would be in line with recommendations from Etsuro Honda, a University of Shizuoka professor and prominent outside architect of Abe’s policies to revive growth and whip deflation, labeled “Abenomics.”
“There’s a great danger from the next sales tax hike, given the current situation where the positive effects of Abenomics and the negative impact of April’s sales tax hike are offsetting each other,” Honda told reporters Wednesday after meeting a group of more than 40 LDP lawmakers who are growing wary about the proposed next hike.
Abe raised the sales tax to 8 percent from 5 percent in April, the first of a planned two-stage increase that is the boldest attempt in nearly two decades to curb Japan’s public debt, which is well over twice the size of its economy.
The April hike walloped personal spending, knocking the economy to an unexpectedly deep 7.1 percent annualized contraction in the second quarter, the worst fall since the global financial crisis in early 2009.
Abe has said he is “neutral” over his December decision on whether to proceed with the plan to raise the tax to 10 percent next year, which would double the rate in just 18 months. He has stressed the need for both fiscal reform and continued recovery.
The prime minister this month told the Financial Times that while it is necessary to raise the tax for the benefit of future generations, it would be “meaningless” if this inflicted too much damage on the country’s economy. This was largely a repetition of his earlier position.
The two-step tax increase was decided by major parties and written into law before Abe came to power in late 2012, but it requires him to certify that the economy is strong enough to withstand a further hike.
“What country has ever raised (their consumption) tax by 2 percentage points just a year and a half after a tax hike?” the senior official asked. “The logic that (the government must proceed) because the law was already decided doesn’t hold up.”
Respondents in a Reuters poll last week largely expect Abe to proceed with the tax hike as scheduled, though not all think it’s a good idea. “Given the prospects of a slower global growth, it would be difficult for the prime minister to risk another tax hike slump on the economy,” said Stefan Grosse, an economist at NORD/LB.
Abe’s government last week cut its economic assessment for a second straight month and lowered its assessment of industrial output for the first time in five months, as weak consumption following April’s hike is causing companies to cut production. The BOJ’s closely watched “tankan” survey this month showed that sentiment in the services sector worsened in the third quarter while the economy struggled to shake off the tax hike.
And as the recovery falters, Abe finds himself in an unaccustomed political pinch.
His government’s approval rating has slumped to 53 percent, still solid for a Japanese leader, but down 9 points in less than a month, according to an opinion poll published Sunday in the Yomiuri Shimbun. The survey found 71 percent of respondents were against raising the sales tax next October, versus 26 percent in favor.
Proponents of the tax hike, including BOJ Gov. Haruhiko Kuroda, whose bank buys some 70 percent of new government bond issuance, fear that a delay could shake investor confidence in the nation’s fiscal reform, causing a dangerous spike in Japanese government bond yields. The 10-year JGB currently yields less than 0.5 percent.
But University of Tokyo economist Shin-ichi Fukuda said that “as long as the BOJ is buying large amounts of JGBs, a short-term rise in yields isn’t a big concern.”