Prime Minister Shinzo Abe on Friday expressed a willingness to postpone next year’s planned consumption tax hike at the last minute if the economy is hit by an event of similar magnitude to the 2008 financial crisis.
“If that happens, we will protect the national economy,” Abe said at a House of Councilors Budget Committee meeting. “To protect employment, we must avoid the wrong economic policy choice.”
At the same time, Abe stressed there is no such serious situation at present.
He also said he has given no consideration to dissolving the House of Representatives for a snap election anytime soon.
The consumption tax rate is set to be raised from 8 percent to 10 percent in April 2017. Speculation is growing, though, that Abe may put the tax hike on hold and call a snap election for the Lower House.
“If the tax hike does not lead to a rise in tax revenue, it would make no sense,” Abe said. “It’s natural to avoid a path that puts the Japanese economy in danger.”
Abe also denied that he has any plans to compile a supplementary budget for fiscal 2016, starting next month, including stimulus measures.
Abe’s comments follow recent warnings from Nobel laureate economists Joseph Stiglitz and Paul Krugman that Japan’s economy is too weak to withstand another tax hike.
The economy initially expanded under a policy mix dubbed “Abenomics” that included monetary easing and fiscal stimulus.
However, China’s slowdown, weaker-than-hoped-for growth in other economies and lackluster spending by households and businesses have combined to keep Japan’s growth well below forecasts. Cheaper oil prices, meanwhile, have slowed progress toward a 2 percent inflation goal that Abe and his advisers say is needed to revive the “animal spirits” that will get growth back on track.
The economy contracted at a 0.3 percent annual rate in October-December and is forecast to shrink again in the current quarter.
The sales tax was due to rise to 10 percent from 8 percent last October, but that increase was deferred until April 2017. Now many here are betting that with an election for the Upper House of the Diet looming, Abe will once again postpone that hike.
“The headwinds that are facing us are far stronger than what the policymakers expected,” said Masamichi Adachi of JPMorgan in Tokyo. “You can make an argument that it’s a good excuse to change the original plan.”
An April 2014 tax hike from 5 percent to 8 percent was an urgent priority to try to rein in Japan’s public debt, which has ballooned to more than twice the size of its GDP. But the move led to a sharp economic contraction, and despite a barrage of monetary stimulus, the economy has meandered in and out of recession ever since.
Inflation has also remained flat. Core inflation, which excludes volatile food prices, was zero in February, data released Friday showed. Earlier in the week, the government downgraded its assessment of the economy for the first time in five months.
Chief Cabinet Secretary Yoshihide Suga, one of Abe’s most powerful allies, says the tax will be raised unless it is clear the hike will hurt the economy so badly that tax revenues would fall.
That is where the economic big guns come in, as Abe seeks advice ahead of the Group of Seven leaders summit scheduled to be held in Ise-Shima, Mie Prefecture, in late May.
TV news showed Stiglitz and Krugman addressing Abe and other top officials. Both men urged Abe not to raise taxes.
“I’m a great admirer of the policy moves that have been made by Japan, but they are not good enough, and partly because all the rest of us are in trouble as well,” Krugman said.
According to documents posted online, Stiglitz called for boosting demand and countering rising inequality by retraining workers, improving social services networks such as child care, and improving oversight of the financial sector.
Since Abe earlier promised to go ahead with the next tax hike unless the global economic outlook is too weak, a pessimistic assessment of the global situation could provide a pretext for another postponement, while deflecting criticism of his own policies and Japan’s domestic economic performance.
“If the Japanese economy is not doing well, it’s the failure of Abenomics,” said Adachi of JPMorgan. The consultations with top foreign experts allow Japanese leaders to say: “Our policy is working and it’s the fault of the severe global environment.”
However, he noted, if Abe delays the tax hike he likely will call a snap general election, just as he did in late 2014. That is not an easy choice for the head of a ruling coalition that holds a two-thirds majority in the Diet’s powerful Lower House.
Economist Tomo Kinoshita of Nomura Securities Co. puts the likelihood of a delay at 40 percent.
“It’s not the main scenario, but the possibility of a delay is growing,” he said.