Tax hike’s economic impact divides experts

Some point to successes overseas, others argue '97 rise sank recovery


Staff Writer

Economists and experts remain split over whether raising the consumption tax would help restore the country’s battered public finances or choke future economic growth.

The ruling Democratic Party of Japan is hoping to double the 5 percent levy in 2015, in two stages. Raising the sales tax by 1 percentage point would generate an estimated ¥2.5 trillion in additional income.

Those in favor of increasing the tax point to previous cases overseas.

“Looking at increases abroad shows they don’t cause substantial damage to countries’ economies,” Mitsumaru Kumagai, chief economist at Daiwa Institute of Research, said Thursday during a lecture in Tokyo.

According to Kumagai, a study of 67 sales tax hike cases in Europe since 1980 shows the impact on growth is “limited” and often doesn’t have any economic impact.

In his book, “Shohi-zei Ga Nihon wo Sukuu” (“Consumption Tax Will Save Japan”), Kumagai writes that the mounting costs of social security, Japan’s aging society and its horrendous mountain of debt necessitate an urgent tax hike so “future generations don’t have to shoulder the burden.”

Some proponents even expect to see growth rise in the runup to a future tax rise, arguing consumers will rush to spend more before it kicks in.

But other analysts believe an increase would cool consumer spending and damage Japan’s already frail economy, citing studies by Daiichi Life Research Institute showing a 10 percent levy would impose an additional ¥165,000 tax burden each year on a family of four.

Speaking at a Diet hearing Wednesday, Kaetsu University professor and economics expert Yoichi Takahashi also expressed opposition to raising the sales tax, saying a hike should only take place after the government tackles other pressing issues, including chronic deflation and massive public debt.

A fierce debate is also being waged over whether the last increase in the consumption levy in April 1997, when the late Prime minister Ryutaro Hashimoto raised the rate from 3 to 5 percent, proved successful.

The country slipped into a recession almost immediately, and Hashimoto was blasted for stifling a desperately needed economic recovery.

Prime Minister Yoshihiko Noda, who is currently leading efforts to raise the levy, himself blamed Hashimoto over the 1997 hike during his days as an opposition lawmaker.

“The economy was regaining its strength back then, similar to the way a person recovers from a cold. But (the 1997 tax rise) splashed cold water on the patient and caused pneumonia,” Noda told a Lower House session in 2004.

Kensho Sasaki, a Japanese Communist Party lawmaker from the Lower House, specifically referred to those remarks by Noda while telling a Diet committee on tax reform that Japan “has caught a cold and is still sick in bed. If the government were to splash cold water (on the economy) it will induce a worse scenario” than the 1997 downturn.

Still, those pushing for the levy to be raised claim the recession that started in 1997 was mainly caused by other factors, including that year’s Asian financial crisis, and not by the tax hike.

A report that University of Tokyo professors Hiroshi Yoshikawa and Hiroshi Ibori submitted last year to the government’s council on social security reforms emphasized that the tax increase was “not the main cause of (the 1997) recession.”

Daiwa Institute’s Kumagai shares this view.

In addition to the economic meltdown in Asia, a number of momentous events impacted Japan’s economy around that time, including the failure of Hokkaido Takushoku Bank in 1997 and the bankruptcy of Yamaichi Securities Co. the following year, he said.

Rapidly waning expenditure on public works projects to rebuild Kobe after the 1995 Great Hanshin Earthquake was another major factor, he added.

In his book, Kumagai writes that the last tax hike clearly “took place at a bad time,” but adds that “it would be an illogical leap to say that raising the consumption tax caused serious damage to Japan’s economy.”