Business

Forget consumption tax hike and give structural reform another try, ex-economy chief Heizo Takenaka says

by Yuko Takeo and Emi Urabe

Bloomberg

Prime Minister Shinzo Abe should again abandon his oft-delayed plan to hike the consumption tax this year because it risks pushing Japan’s economy into recession and hampering efforts to generate stable inflation, according to former economy minister Heizo Takenaka.

“Of course a sales tax hike would increase the possibility of a recession,” said Takenaka, now a professor at Toyo University. “That’s why managing the economy this year is extremely difficult.”

Takenaka added that the focus on raising revenues through the higher tax also misses the point that social security reform must come first.

Takenaka’s comments come amid growing concern the economy may be highly vulnerable if the sales tax is hiked to 10 percent from 8 percent in October. In August 2012, the Diet passed legislation to double the consumption tax to 10 percent from 5 percent in two stages.

While the government has planned more steps to soften the blow from the tax increase than on previous occasions, the economy has a track record of shrinking after hikes.

Economists are already warning that the economy may be contracting in the first quarter as China’s slowdown, trade tensions, and the cooling of global tech demand squeeze growth.

Takenaka warned that the Bank of Japan doesn’t have much firepower of its own left to stimulate the economy further should it fall into recession.

The higher tax rate would only raise a limited amount of funds for Japan’s ballooning social security payments, given the exemptions for essential goods such as food, and use of the revenue to fund free education and promote cashless payment systems, he said.

“The largest problem Japan’s fiscal debt faces is its social security conundrum,” said Takenaka, who served in the administration of former Prime Minister Junichiro Koizumi. “Unless you cut out the irrational parts of that and conduct reform, nothing will change, barring a sales tax hike up to something like 30 percent.”

Given clear side effects from the BOJ’s easing policy, the government must get on with deregulation that can drive economic growth while it has the opportunity, instead of going ahead with a potentially deflationary tax hike, he added.

“Japan shouldn’t be raising its sales tax when the 2 percent inflation goal hasn’t been reached, and Japan hasn’t completely escaped from deflation,” said Takenaka. “I don’t think the prime minister wants to do it either.”

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