Speculation is mounting that Prime Minister Shinzo Abe may once again postpone the consumption tax hike to 10 percent — scheduled in April 2017 — and use the decision as a reason for dissolving the Lower House for another snap election, likely along with the triennial Upper House election this summer. Two renowned U.S. economists invited to speak at recent meetings hosted by Abe to “analyze international financial and economic” conditions before Japan hosts the Group of Seven summit in May suggested that the tax hike should be postponed in view of global economic troubles. The meetings are widely viewed as a stage set by Abe to delay the tax hike for the second time, out of concern that it could further dampen consumer spending and threaten his pledge to pull Japan out of deflation.
Consumer spending, which accounts for 60 percent of Japan’s gross domestic product, has remained weak since the consumption tax was raised to 8 percent in April 2014 — the first hike in 17 years — keeping the nation’s economic growth fragile and uneven. It’s fairly easy to imagine that the second-phase hike to 10 percent mandated in the law enacted by the previous Democratic Party of Japan-led government — which Abe already postponed by 18 months to April next year — would aggravate consumer sentiments.
It may make sense for the Abe administration to further delay the tax hike to ensure his trademark economic policy remains on its way to end deflation. But the wisdom of postponing the tax hike once again needs to be carefully weighed against the risk that the delay would pose to the nation’s fiscal rehabilitation efforts. The prime minister also needs to reflect on and explain to voters why Abenomics has failed to lift the economy to a level that can accommodate the tax hike, which is supposed to help pay for the ballooning welfare costs of the rapidly aging population. Political interests, including boosting the chances of his ruling coalition’s gains in upcoming elections, should have no place in the decision.
Abe told an Upper House session this week that the tax hike to 10 percent in April 2017 would go ahead unless there are emergencies to the tune of the global recession triggered by the 2008 collapse of Lehman Brothers and the 2011 Great East Japan Earthquake and tsunami, the same statement that he has been repeating since he postponed the hike the last time in November 2014 — and dissolved the Lower House for a snap election to seek voters’ verdict on the decision and his economic policies.
But Abe has also said in recent weeks that raising the consumption tax rate would come to nothing if it results in tax revenue falling or the economy losing steam, noting that he would keep close watch over economic conditions. He seems to be creating more room for an excuse for his administration to delay the tax hike next year. Nobel laureates Joseph Stiglitz and Paul Krugman are not alone in suggesting to the prime minister that the tax hike be delayed. Abe’s economic policy advisers have been openly urging him to shelve the tax hike in favor of growth. Koichi Hamada, a Yale University professor emeritus of economics, told a TV Tokyo program on Friday that the global market has already factored in Japan’s tax hike delay and that a hike as scheduled would adversely affect the market.
A hike in the consumption tax has been politially risky for the administrations in power ever since it was introduced in 1989. On the other hand, no voters would likely oppose delaying or canceling a tax increase. Abe’s Liberal Democratic Party-Komeito alliance retained a two-thirds majority in the December 2014 Lower House election. It should come as no surprise if the prime minister is hoping for a repeat of the electoral performance this summer by again postponing the tax hike.
Abe has reasons to solidify his ruling bloc’s chances in the election this summer. The prime minister has openly said he wants to revise the Constitution before he leaves office. For that to happen, the LDP and other parties that support constitututional amendment together need to win a two-thirds majority in the Upper House in the triennial election — likely to be held in July — and initiate an amendment for a national referendum by September 2018, when Abe’s supposedly last term as LDP president expires. One reason that speculation will not die — despite repeated denials by Abe himself — that the prime minister might dissolve the Lower House for a snap election along with the Upper House poll is that a simultaneous election of both chambers of the Diet is believed to work in favor of the ruling party. The past two such elections — in 1980 and 1986 — both resulted in landslide victories for the LDP.
Of course it may be a gamble to hold another snap election only 19 months after the last one, especially given that the LDP-Komeito alliance might lose its two-thirds grip on the Lower House. One plausible scenario floated in media reports is for the prime minister to decide to postpone the April 2017 tax hike — after reviewing the January-March GDP data due to be released in mid-May — and dissolve the Lower House before its current regular session closes on June 1 to seek popular verdict on his decision.
There will be arguments on both sides of the question whether to raise the consumption tax as planned. But it at least seems clear that the answer to the question should not be driven by partisan political interests.