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Next consumption tax raise painting Abe into a corner

On Aug. 13, the Cabinet Office released preliminary economic figures for the April-June period, showing that gross domestic product (GDP) decreased 6.8 percent on an annualized basis in real terms from the previous quarter, the biggest negative growth rate recorded since the triple disasters on March 11, 2011.

While it is true that the fall in GDP represented a reaction to a big spending spree by consumers ahead of the consumption tax increase from April 1 from 5 percent to 8 percent, the drop was greater than the GDP contraction in 1989 when the consumption tax was first introduced and in 1997 when the tax rate went from 3 to 5 percent.

Chief Cabinet Secretary Yoshihide Suga sensed a crisis when the figures appeared worse than expected. He began to suspect that the real situation of the Japanese economy may well be far worse than the officially announced figures indicate. Therefore, distrust in the Finance Ministry has emerged.

A closer look at the preliminary figures shows that the economic situation is worse than expected. Consumption was down 12.4 percent from the January-March period. Investments in public works projects fell by 2 percent despite the government’s ¥5.5 trillion supplementary budget, which could not fulfill its aim because of labor shortages. Conversely inventories were up by 3.9 percent due mainly to unintended stockpiling of unsold goods.

Wages rose at a very slow pace despite Abe’s urging businesses to pay more to their employees. With consumer prices rising by more than 3 percent, people’s real income declined.

In addition, exports to other Asian countries, mainly to member countries of the Association of Southeast Asian Nations (ASEAN), remain sluggish.

Especially hard hit were rural areas, where wages do not rise as in Tokyo, although prices, especially gasoline prices, shot up, complained an executive of a local bank.

All these factors have started shaking the very foundation of Abenomics — economic policies promoted by and named after the prime minister.

While Abe was working on revising the constitutional interpretation in order to enable Japan to exercise the right to collective self-defense, Seiko Noda, then general council chairwoman of his Liberal Democratic Party, commented: “The right to collective self-defense is not the top priority issue. Everybody knows the most fundamental task is to resuscitate the economy. Yet, that task has only been half finished.”

The demand and supply gap, which once shrank to ¥2 trillion, is said to have bounced back to ¥10 trillion.

When Abe and his wife Akie in late July visited the Pyramid of the Sun in Mexico, where visitors are supposed to be assured their dream will come true, reporters asked what his wishes were. His response was “ending the deflation and revitalizing rural areas.”

In July, Abe, who originally was not keen on raising the consumption tax rate, and his right-hand man Suga have begun to suspect the trustworthiness of the officially announced economic figures, since the prime minister will soon have to decide whether or not to raise the consumption tax rate from the current 8 percent to 10 percent effective Oct. 1 next year as provided by law.

After returning from his tour of Central and South America on Aug. 4, Abe held a series of meetings with the top brass of the Finance Ministry, including Finance Minister Taro Aso, who is also deputy prime minister, and Administrative Vice Finance Minister Shunsuke Kagawa. It is believed that Abe put the brakes on the ministry’s endeavors to prepare the ground for the additional consumption tax hike.

Suga started to show a reluctance toward the tax hike. He said: “The consumption tax raise had been decided upon by the Democratic Party of Japan government, which blindly followed advice from the Finance Ministry. If Abenomics falls flat on its face as a result, all the efforts so far will come to nothing.”

One question is when Abe and his government will announce a decision on the consumption tax. Abe himself has so far remained noncommittal about the timing, but has made clear that first he will wait to see the preliminary economic figures for the July-September quarter, to be released on Nov. 17, and then receive advice from knowledgeable people.

Delaying the tax hike beyond the legally set date of Oct. 1, 2015, will require revisions of relevant laws. Legislative bills for that purpose may be submitted to the Diet during its extraordinary session this fall at the earliest.

Needless to say, the Finance Ministry would put up strong resistance on the grounds that there is not enough time to prepare the revision bills. It also points out that delaying the tax hike would hinder efforts to reduce fiscal deficits — Japan’s international promise — and arouse fear of nose-diving government bond values.

Gov. Haruhiko Kuroda of the Bank of Japan does not support any delay in raising the consumption tax rate. On Aug. 23, at an international economic forum held in Jackson Hole, Wyoming, Kuroda, formerly with the Finance Ministry, pointed to improvement in both employment and wages and said the Japanese economy will achieve recovery in the July-September period.

Although Kuroda was handpicked for the present post by Abe shortly after the start of his second stint as prime minister in late 2012, discord appears to have developed between them over the second consumption tax hike. The impact that such discord could have on the market should not be underestimated.

Meanwhile, Natsuo Yamaguchi, head of New Komeito, a junior partner in the LDP-led coalition, is also against postponing the consumption tax raise. He has repeatedly said that any delay would be tantamount to Abe admitting that Abenomics was a failure.

After his visit to Central and South America, Abe’s momentum appeared to have waned as shown by his almost harrassing behavior toward then LDP Secretary General Shigeru Ishiba. This led Ishiba at one point to refuse to join a planned reshuffled Cabinet and to forgo any position with the LDP.

That would have been tantamount to Ishiba deciding to run against Abe in the LDP presidential election in September 2015. In that case, the biggest point at issue would have been Abenomics. [In the Sept. 3 Cabinet reshuffle, Ishiba eventually agreed to become minister in charge of regional revitalization.]

It would be impossible to praise Abe’s actions on the very day when large-scale landslides hit the city of Hiroshima.

Abe left his villa in Yamanishi Prefecture to go to his official residence and then returned to his villa from the official residence while the disaster was still hitting the city. That exposed his lack of determination as a leader. His aberrant behavior highlighted the lack of close aides able to advise him without reservation. The same can be said with regard to economic policy, too.

The Abe administration, which is obsessed with the movement of stock prices, is trying to reform the Government Pension Investment Fund, which manages funds totaling up to about ¥130 trillion. Coming into sight are two main strategic pillars aimed at promoting Abenomics: postponing the consumption tax increase to 10 percent and raising stock prices.

Both events clash head-on with the Finance Ministry’s emphasis on restoring financial health through a consumption tax hike and trade in the bond market rather than in the stock market.

At the World Economic Forum meeting in Davos, Switzerland, in January, Abe pledged to lower the corporate tax rate. Following up on this, Suga has been telling the Finance Ministry that Japan must abide by Abe’s “international promise.”

But the question of how to secure a fund to carry out the corporate tax cut has not been resolved.

The market has not responded to Abe’s promise to lower the corporate tax. It is said that’s because the Abe administration has not yet made clear how much the tax will be lowered.

In the wake of a shock from the 6.8 percent fall in GDP, a war of nerves has flared up again between the prime minister’s office and the Finance Ministry. It’s a strange situation. Abenomics is now standing in the way of Abe.

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