Business / Economy

Abe's tax hike plan faces uncertainty as economy sputters, experts say

by Satoshi Iizuka

Kyodo

Prime Minister Shinzo Abe has reaffirmed his plan to raise the consumption tax in October, but there is growing speculation that he could be forced to postpone the hike to safeguard growth amid a sputtering economy.

Abe told the Diet on Friday that he would raise the tax as scheduled “unless there is an event on a scale similar to the Lehman shock,” a reference to one of the triggers of the 2008 global financial crisis.

The government, meanwhile, stressed that the world’s third-largest economy is “recovering,” defying market expectations that it would stop using the word in its latest monthly report amid weaker production and exports due to China’s economic slowdown amid its ongoing trade war with the United States.

However, an increasing number of economists suspect that the latest growth phase, touted by the government as being the longest since the end of World War II, has ended, and that raising the tax — from 8 percent to 10 percent — would thrust the economy into recession by hurting household and business spending.

“There is no doubt that the Japanese economy has been in stagnation,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, adding that the outlook has become uncertain mainly due to weak exports to China.

The conflict between the United States and China, both major trading partners of Japan, is a source of serious concern for the country’s business leaders.

Shigenobu Nagamori, chairman of Nidec Corp., said earlier this year that the maker of electric motors saw “extraordinary” slides in demand and sales in China late last year.

Kuniharu Nakamura, head of major trading house Sumitomo Corp., said this month that the trade row had affected supply chains, and could eventually hurt Japan.

“Since many countries are integrated into supply chains, (the U.S.-China trade war) will gradually have a negative impact” on the global economy, he said.

The combined net profit of companies listed on the Tokyo Stock Exchange’s first section fell 7.3 percent in fiscal 2018 from a year earlier to ¥33.5 trillion ($306 billion), marking the first decline in three years, on a downturn in China, according to data compiled by SMBC Nikko Securities Inc.

In addition, deepening uncertainty over the U.K.’s plan to bolt from the European Union has also added to woes for Japanese firms and made them reluctant to make fresh investments.

Capital expenditure turned downward and slipped 0.3 percent in the three months through March, according to gross domestic product data released earlier in the week by the government, which showed the economy staging stronger-than-expected growth for technical reasons.

A number of firms said they have yet to sufficiently reflect the global economic environment in their earnings forecasts.

The consumption tax was raised to the current 8 percent from 5 percent in April 2014 in the first stage of the planned two-stage hike, and the move was widely seen as having nipped the country’s economic recovery in the bud.

Abe has already postponed the second hike twice to ensure the economy would continue to expand.

However, economic conditions are worsening compared with the situations that preceded Abe’s two postponement decisions, said Takahide Kiuchi, executive economist at the Nomura Research Institute.

The economy is expected to remain on pins and needles as the country waits to find out if it is truly in a recession, and as Abe looks to adopt a wait-and-see approach to whether the U.S. turns up the heat even further on China in their tit-for-tat tariff battle.

“The fourth round of additional tariffs (by the United States) will likely become a watershed” moment for Abe to determine whether to raise the tax, said Shunsuke Kobayashi of the Daiwa Institute of Research, referring to fresh levies U.S. President Donald Trump has threatened to impose on Chinese imports, possibly in late June.

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