Prime Minister Shinzo Abe confirmed Tuesday that the government will raise the consumption tax rate from the current 5 percent to 8 percent from April 2014. He apparently believes that the Japanese economy is strong enough to weather the likely negative impact of the tax increase — an economic slowdown due to consumers tightening their purse strings — but there is no guarantee that things will go as he wishes.
Mr. Abe said in his statement that the consumption tax hike is necessary to make social welfare services sustainable. But measures the government is to take in connection with the tax hike are mainly aimed at beefing up support for businesses rather than helping out households. Given its track record, there is a strong chance that the government will rely on pork-barrel projects to stimulate the economy, which would defeat the very purpose of the consumption tax hike — the restoration of Japan's financial health.
The central government's accumulated debts have already topped ¥1,000 trillion. But the budget requests for fiscal 2014 reached a record ¥99.2 trillion and the government will likely increase public works spending. Unfortunately such a course of action will increase government debt but do little to strengthen the economy. Households will be hit hard not only by the consumption tax increase but also by rises in the cost of electricity, city gas and food attributable to the cheap yen policy being pursued by the Bank of Japan in accordance with Mr. Abe's economic policy.