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Hesitating on sales tax hike?

Prime Minister Shinzo Abe is inclined to delay the increase of the consumption tax rate currently scheduled to take effect in April 2014, according to a number of people who have talked with him recently.

Volatile stock market movements and foreign exchange fluctuations in recent weeks seem to have led him to fear that if the tax rate is raised as scheduled, the nation’s economy will be adversely affected, despite showing signs of recovery after he took office last December.

He has been quoted by some as saying that he was not thinking of putting off the consumption tax hike for two or three years but that a delay of six months may be worth considering. It is feared, however, that any delay, even for a short time, could lead the market to become suspicious of the government’s efforts to restore the nation’s fiscal health, which in turn could create the worst scenario of a sharp fall in the value of national bonds and a steep rise in long-term interest rates.

Although an existing law stipulates that the current consumption tax rate of 5 percent be raised to 8 percent in April 2014 and further to 10 percent in October 2015, it has a proviso that the timing may be finalized by the government with due regard to the prevailing state of the economy.

Abe was not too enthusiastic about raising the tax rate when he was running for the office of president of the Liberal Democratic Party last fall. Even after becoming prime minister, he has repeatedly said he will decide the timing of the consumption tax hike in the fall of this year. He does not seem to be bothered by criticisms that any delay in the tax rate hike would be tantamount to admitting that his economic policy known as “Abenomics” was a failure.

Interestingly his idea of delaying the tax hike is not favored by many who hold key posts within his administration. Akira Amari, minister for economic revitalization and Abe’s sworn friend, used to entertain the idea that fiscal reconstruction is possible if the economy is freed from the shackles of tax hikes. Now he is in a government position where he can no longer ignore the concerns of business circles that delaying the tax hike might lead to a rise in long-term interest rates.

Taro Aso, deputy prime minister and concurrently finance minister, used to be critical of tax increases. But he has apparently been brainwashed by bureaucrats of his ministry, who point out that although total tax revenues dipped in the quarter that immediately followed the previous increase of the consumption tax (from 3 percent to 5 percent in April 1997), the revenues recovered in the next quarter.

Kozo Yamamoto, a LDP Lower House member who is reputed to be the author of Abenomics, also seems to side with Finance Ministry officials who favor raising the tax rate as scheduled even if that would require a temporary increase in fiscal expenditure to offset the negative effect of the tax hike.

But Abe’s idea of delaying the timing of the tax increase is receiving support on several fronts. For example, professor Joseph Stiglitz of Columbia University, who has high regard for Abenomics, told a meeting sponsored by the government on May 30 that it would be premature to raise the consumption tax rate in April 2014.

Some business organizations harbor a cunning scheme. Having failed to gain agreement from the ruling coalition parties to their call for applying a lower consumption tax rate to certain items when the tax rate is raised, these groups are calling for skipping the initial tax hike to 8 percent and directly moving to a hike to 10 percent in October 2015 while continuing to apply the current 5 percent rate to those certain items.

It is well known that the biggest supporter of the idea of introducing a lower consumption tax rates for certain items is newspaper publishers. With the number of newspaper readers dwindling, especially among younger generations, the publishers fear that any newspaper price increase in accordance with a consumption tax increase will cause total newspaper circulation to plummet by millions. If newspapers call for directly moving to a consumption tax hike to 10 percent later by skipping a raise to 8 percent, it will serve as strong support for Abe.

Abe has stated clearly that he will make up his mind in October on the basis of economic indicators for the April-June period and economic conditions prevailing in the July-September period. While many are optimistic about the figures for the April-June period because of high stock market prices and a cheap yen through May, uncertainties remain about the July-September period.

More important is whether Abe will make his final decision solely on the basis of economic factors. Since he wants to stay in power for a long period of time in order to accomplish historic tasks such as amending the Constitution, he would like to avoid a situation in which the tax hike leads to a lower rate of approval, which may in turn lead dissatisfied elements within his party to revolt against him.

People close to LDP Secretary General Shigeru Ishiba, who aspires to succeed Abe, think that if Abe loses steam as a result of the tax hike, that would work to Ishiba’s advantage. Raising the consumption tax rate as scheduled would create a situation advantageous to him.

But Ishiba has not clarified his position, saying on one hand that the tax hike has not yet been firmly decided on and, on the other, that consideration must be given to maintaining fiscal discipline and preventing a sharp drop in the value of national bonds or a steep rise in long-term interest rates.

Some observers think that Chief Cabinet Secretary Yoshihide Suga holds the key to Abe’s decision on whether to postpone the date of the consumption tax increase.

Unlike Aso, who has been influenced by bureaucrats of the Finance Ministry, Suga gained the upper hand over the ministry when he forced Atsuo Saka, formerly a high-ranking Finance Ministry official, to resign as president of Japan Post Holdings.

That said, Abe would find it difficult to delay the tax hike if he faces opposition from Suga to such a delay. Conversely if Suga concurs with Abe’s plan to delay the tax hike, neither Aso nor the Finance Ministry will be able to stop the move.

In any case, if the date for implementing the increase of the tax rate is put off not purely for economic considerations but rather because of a power struggle or lobbying by business groups that have vested interests, Japan could conceivably face unfavorable reactions from the international community and the market.

At a summit meeting of the Group of Eight industrialized nations held in Northern Ireland June 17-18, Abe was urged to move toward regaining Japan’s fiscal health. But he emphasized that he will raise the consumption tax rate only if the circumstances are right. This suggests he lacks a sense of crisis.

This is an abridged translation of an article from the July issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.