Prime Minister Shinzo Abe on Monday will formally announce that the government will raise the consumption tax to 10 percent from the current 8 percent in October 2019, government sources said Sunday.
Abe is expected to make the announcement following an extraordinary Cabinet meeting where a supplementary budget for fiscal 2018 is likely to be approved.
He has said the government will raise the consumption tax next fall as scheduled unless significant economic turmoil occurs.
As the envisioned tax hike is expected to dampen consumption as seen in the past hikes, the Abe government will instruct ministries and agencies to take steps to prevent the economy from deteriorating by encouraging purchases of houses and cars through incentives such as tax breaks. It is considering to pay up to ¥500,000 to those who buy a house with annual income of 7.75 million or less. Another possible option on the table is giving monetary points to consumers who purchase goods at small stores with credit cards, as the government is also trying to promote cashless payments.
Japan raised the consumption tax from 3 percent to 5 percent in April 1997. The rate was hiked to the current 8 percent in April 2014 under Abe’s administration.
Although the tax hike from 8 percent to 10 percent has been treated as the second stage of a two-stage consumption tax hike from 5 percent to 10 percent, Abe has pushed backed the schedule twice, first from October 2015 to April 2017, and then to October 2019 due to fears it could derail the fragile economy.
Tokyo’s last tax hike in April 2014 was blamed for pushing the country into a brief recession.
While a consumption tax hike is always unpopular with voters, the International Monetary Fund has long asked Tokyo to raise the tax rate to secure sustainable revenues and improve its tattered finances.
IMF chief Christine Lagarde warned earlier this month that the challenges facing the country will “only grow as Japan’s population continues to age and shrink,” noting that both the size of the economy and the population are on track to shrink by a quarter over the next 40 years.
Lagarde met with Abe earlier this month and told him that Japan should make sure that the hike will not negatively affect the economy.
The IMF recommends “that the 2019 consumption tax increase be accompanied by carefully designed mitigating measures to protect near-term reflation and growth momentum. We believe that the fiscal stance should certainly remain neutral at least for the next two years,” she said.
Critics also say that raising the tax from 8 percent to 10 percent is crucial to finance snowballing social security expenditures — especially medical fees — in the rapidly aging society.
Abe recently said that reforming the country’s social security system — pension and national health insurance, among others — is “the biggest challenge” ahead and pledged to tackle the issue
In addition, the world’s third-largest economy has one of the highest debt-to-GDP ratios among rich nations. Much of it is held domestically at low interest rates, allowing Japan to avoid a Greek-style cash crunch.
But a loss of confidence in Tokyo’s ability to pay its debts could send interest rates soaring and increase the risk of a bankruptcy.
Ratings agencies have previously cut Japan’s credit standing over its debt levels.
The IMF says Japan should continue to gradually increase the consumption tax to at least 15 percent to pay for the cost of caring for a rapidly aging population while reducing its massive public debt.