As Japan stares into the abyss, Friedrich Nietzsche is staring back at it. Tokyo, after all, has the German philosopher’s what-doesn’t-kill-you-makes-you-stronger sentiment in mind as some officials insist on raising taxes in a deflationary and recession-prone economy.
Japan would be crazy to do it. Households and businesses are still smarting from a 2014 consumption tax hike, never mind a second jolt planned for 2017. But then Prime Minister Shinzo Abe also is being told he’d be crazy to postpone it. His Finance Ministry warns delay would dent Japan’s reputation in markets. Opposition parties say it would necessitate the resignation of his entire Cabinet. The president of Mizuho, Japan’s second largest bank by assets, says Tokyo risks a credit-rating downgrade.
Abe may announce a decision as soon as Wednesday. Whatever he says, I assign zero odds to Tokyo actually raising the consumption tax from 8 percent to 10 percent next year. And as Abe looks into the financial abyss, it’s his own failure to implement a single major structural reform after 41 months in office staring back at him. Abenomics promised to hasten growth, boost wages, create jobs and raise productivity. Instead, Abe got the Bank of Japan to do all the work, while he tended to pet projects like tweaking the pacifist Constitution.
If Abe’s team had unleashed a startup boom, loosened labor markets, lowered trade barriers and reined in government bureaucracy, it wouldn’t need to raise taxes — receipts would be swelling with gross domestic product. Adding fresh fiscal headwinds wouldn’t make the economy stronger — it would simply kill any remaining prospect of stable growth going forward.
Abe finally seems to be internalizing failure. At last week’s Group of Seven meeting, he even channeled Chicken Little by warning of another Lehman Brothers-like shock. Odds are, Abe was setting the stage for delaying the tax hike for a second time. Abe had said only a giant earthquake or Lehman replay could justify putting off efforts to pay down debt. So, Abe tried to drum up his own little G-7 trembler for domestic political gain.
The prime minister also is trying to blame the failure of Abenomics on the global economy. If only China’s growth were stronger and Nietzsche’s Germany weren’t such a tightwad, Japan might be booming. It means that as Abe looks into the void, delusion are peering back at him.
So where does this leave Japan? Abe is effectively admitting, finally, that the three original “arrows” that comprise Abenomics — monetary, fiscal and deregulatory — haven’t worked. He’s further stipulating that the additional three arrows he announced in late 2015 — promoting innovation, child care assistance and more nursing facilities for the elderly — are equally unimaginative and timid.
The key, as this column has argued before, is to implement the supply-side reforms Abe pitched three-plus years ago. The BOJ long ago reached the limits of its ability to create self-sustaining growth. Tightening fiscal policy again will lead to less household demand, more cautious business investment and necessitate more stimulus packages paid for with fresh borrowing.
Why not force the more than 70 percent of companies that don’t pay taxes to pony up some minimum amount? Abenomics, it’s often said, is Keynesianism run amok. And it was John Maynard Keynes who called tax avoidance the only intellectual pursuit that carries any reward. Don’t executives here know it.
Tokyo could increase inheritance taxes as a means of reducing inequality, triple notoriously low levies on cigarettes, put a price on carbon emissions, police runaway budgets for the Tokyo 2020 Olympics, review white-elephant public works projects and force bureaucrats to fly economy class now and again. It could penalize executives ignoring the better-corporate-governance zeitgeist. Why not impose huge fines on Takata, whose deadly air bags are denting the global auto business and the Japan Inc. brand? Let’s punish financially Toshiba’s accounting shenanigans, Mitsubishi’s fudged emissions tests and dodgy earthquake-resistance data at construction company Toa Corporation.
Cutting corporate taxes is a distraction. It’s not Japan’s roughly 35 percent rate that repels overseas executives, but abysmal productivity, a seniority-based promotion system that stymies innovation, weak English skills, an aging population and a system that confines half the labor force — women — to lesser jobs. The same goes for takeover defenses like cross shareholdings between friendly companies. Other than Taiwan’s Foxconn buying Sharp, Japan Inc. had few nibbles despite a 30 percent yen devaluation in recent years. Abe needs to change incentives by making Japan more competitive.
By raising the consumption tax, Abe would once again be treating the symptoms of Japan’s malaise, not the causes. It’s a lack of growth and wealth creation that shackled Japan with the largest public debt, not the other way around. Mizuho’s Yasuhiro Sato could be right when he tells the Wall Street Journal that Abe risks provoking credit raters by delaying 2017. But Japan may get downgraded regardless if a lack of reform clouds its growth outlook.
It’s ironic, really. Abe was elected in 2012 to end Japan’s lost decades once and for all. By squandering the best reform window of opportunity in over a decade — and tightening fiscal policy to boot — Abe may be ensuring Japan will stare into the abyss for yet another.
William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com
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