Japan's slowing recovery from its worst postwar recession is signaling the economy may be too weak to sustain the higher consumption taxes under consideration by Prime Minister Naoto Kan.
Reports this week showed the jobless rate reached a five-month high in May, and wages, factory output and household spending fell, showing little sign of revival in domestic demand more than a year after the economy stopped shrinking. A gain in the "tankan" business-sentiment index Thursday reflects a postrecession rebound in manufacturers' earnings led by exports.
The risk is that without an end to deflation and rebound in spending, the economy won't be able to withstand the higher levy Kan plans in as soon as two years. Kan, whose Democratic Party of Japan is facing the July 11 Upper House poll, is in danger of repeating the error of his late predecessor, Ryutaro Hashimoto, whose 1997 tax rise helped trigger a recession, Morgan Stanley MUFG Securities Co. said.