It seems Prime Minister Shinzo Abe is likely to postpone the consumption tax hike planned for next October and the public is all for it. But delaying the key measure to address the nation's strained budget balance would only leave an even bigger problem in the future, economists warn.
Abe had been expected to make a decision on whether to go ahead with the second stage of the tax hike to 10 percent, up from the current 8 percent, based on the July-September gross domestic product figures to be announced Monday.
But mainstream media have widely reported he is set to delay the hike, seeking to avert an expected negative impact on the economy already reeling in the first hike, from 5 percent, which came into effect last April 1.
A likely scenario is that the second hike will be postponed by 18 months, according to news reports. Abe is also expected to dissolve the Lower House, which is aimed at solidifying Abe's and the ruling coalition's position in the Diet.
But doing so will only leave the nation with a bigger problem, said Koichi Haji, chief economist at NLI Research Institute.
"For sure, it (delaying) would support growth for the time being, but even if the tax is raised a year and a half later, there's no guarantee the economy won't be bad at that point," forcing, potentially, the government to again consider delaying, Haji said.
"When I think of the future risk that the government finances may fail and become uncontrollable, I'm inclined to think we should avoid that risk," he added.
NLI Research Institute estimated the hike to 10 percent, combined with the negative impact of April's hike, will bring down the fiscal 2015 real GDP forecast by an estimated 1.5 percentage points. But Haji thinks the risk of delaying outweighs the hike's negative economic impact.
The consumption tax hike is aimed at helping to stabilize the nation's deteriorating finances, aiming particularly at the snowballing welfare costs amid its graying population.
According to data compiled by the Organization for Economic Cooperation and Development, the nation's gross financial liabilities exceeded the size of its GDP in 2011 by two times and the ratio is growing.
The government's borrowing totaled some ¥1.039 quadrillion at the end of September.
Hideo Kumano, chief economist at Dai-ichi Life Research Institute, also acknowledges the hike postponement will likely improve growth in the short term, but points out it will leave unsolved the nation's structural problems such as growing medical and social welfare costs.
"Shelving the hike is tantamount to shelving a structural reform measure. I think short-term economic slump should be addressed with tools like additional monetary easing and fiscal stimulus," rather than postponing the tax hike, he said.
The nation is already irked by the first 3-percentage-point hike in April, which has already taken the toll on the economy. Inflation-adjusted GDP for the April-June quarter shrank 7.1 percent in annualized terms, affected by the hike and the bad weather of the summer. The figure is worse than prior expectations and the largest drop since January-March, 2009.
Public opinions are for a postponement, if not entirely against the hike itself, according to a number of recent polls.
In a Yomiuri Shimbun survey conducted nationwide Nov. 7 to 9, for example, 46 percent of the respondents said they feel "a hike is necessary but it should be delayed to a later time" and 37 percent was of the opinion the consumption tax "shouldn't be raised from current 8 percent."
But if the "pain" of the hike is unavoidable, delaying it is just shelving it, and Ryutaro Kono, chief economist at BNP Paribas Securities (Japan) Ltd., thinks it is a telltale sign the government's lack of fiscal discipline to stop the snowballing debt.
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