Prime Minister Shinzo Abe has decided to forgo the consumption tax hike planned for next April, sources close to Abe said Friday.
The decision comes as the Japanese economy is experiencing sluggish growth due to tepid domestic private consumption and the slowdown in emerging economies, especially China. Consumer spending in Japan plunged following the previous sales tax hike in April 2014.
The tax hike could be delayed by around two years or possibly about 18 months until the autumn of 2018, when Abe’s stint as president of the ruling Liberal Democratic Party expires, the sources said.
Abe is expected to announce his decision as early as Monday, they said.
The current global economic conditions look similar to “the situation before Lehman,” Abe told other Group of Seven leaders Thursday when the advanced economies began a two-day summit in Japan, according to a senior Japanese official.
Abe was referring to the 2008 collapse of U.S. investment bank Lehman Brothers Holdings Inc., which led to the global financial meltdown and economic downturn. He cited the plunge in crude oil and other commodity prices in recent years.
Abe has said the government will raise the tax unless there is major economic turmoil on the scale of the “Lehman shock” or a major natural disaster. He has yet to make clear whether the recent strong earthquakes in southwestern Japan, which have disrupted manufacturing and hurt tourism, fall into the latter category.
This is the second time that Abe has delayed the consumption tax hike after the Democratic Party of Japan, the LDP and Komeito agreed in 2012 to increase the tax in two stages — by 3 percentage points to 8 percent in April 2014, and then to 10 percent in October 2015.
After announcing in November 2014 the postponement of the second tax hike, Abe has repeatedly said he would go ahead with the consumption tax hike reset for April 2017 unless there was a major global economic shock or another earthquake equivalent to the one that devastated northeastern Japan in March 2011.
Prior to his latest decision, the government held a series of meetings with experts from at home and abroad analyzing the world economy to prepare for the G-7 summit hosted by Japan, and widely seen as influencing Abe’s decision on the tax hike.
The experts presented differing views. Nobel Prize laureates Paul Krugman and Joseph Stiglitz recommended Japan postpone the tax hike planned for April 2017, while Angel Gurria, chief of the Organization for Economic Cooperation and Development, said the tax hike was needed to cope with Japan’s ballooning debts.
The further delay is likely to put the brakes on Japan’s efforts to pursue fiscal consolidation, as its fiscal health is the worst among major industrialized economies with public debt at more than 200 percent of nominal gross domestic product.
The government has committed internationally to turn Japan’s primary balance into a surplus by fiscal 2020. That means Japan has committed to raising more annually in tax revenue than the government spends except on debt servicing.
Under the fiscal 2016 budget, around 30 percent of government spending is to be financed by debt.
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