Prime Minister Shinzo Abe’s decision to once again postpone the consumption tax hike, this time by 30 months through October 2019 — well after his supposedly last term as Liberal Democratic Party president will have ended — may be the right move to avoid weakening consumer spending, which would only slow his administration’s bid to bust deflation. But delaying the tax hike alone won’t generate the kind of economic conditions that Abe pledged to achieve through his trademark policies.
Of course the prime minister won’t accept the charge that his decision — despite the pledge he made the last time he postponed the tax hike in 2014 that he wouldn’t do so again — represents the failure of Abenomics, which would give ammunition to the opposition camp trying to take on his ruling coalition in the Upper House election several weeks from now. At the news conference Wednesday where he announced the decision, Abe denied the opposition charges by saying that under his watch, tax revenues surged by trillions and employment figures have improved to their best level in nearly a quarter century.
But what the prime minister needs to do is not insist that his policies have been working as intended — and lay the blame somewhere else — but make an honest assessment of what has been lacking in his administration’s economic management since he returned to the government’s helm in late 2012. Delaying the tax hike may buy more time for reviving the economy, but it must not be wasted by repeating the same policies of the last four years.
Politically, Abe’s highly anticipated decision raises credibility questions about the words of the top government leader. When he postponed the tax increase to 10 percent by 18 months in 2014 — after the April 2014 hike to 8 percent resulted in steep downturn in the economy for two quarters — he said he would not delay the rise any further and that he would make sure to create economic conditions that would accommodate the hike by pushing the “three arrows” of Abenomics. He later reiterated that he would raise the tax to 10 percent in April 2017 as planned unless the economy was hit by a major shock to the tune of the global recession triggered by the collapse of Lehman Brothers in 2008 or the 2011 Great East Japan Earthquake.
The remarks he reportedly made at the Group of Seven summit that he hosted in Mie Prefecture last week — that the world economy today resembles the situation prior to the 2008 Lehman shock and runs the risk of falling into another crisis unless timely and appropriate actions are taken — was widely taken as a cue that he was going to postpone the tax hike after all. His assessment of the state of the world economy did not appear to be entirely shared by his G-7 peers. Still, he said his decision to delay the tax hike — which was even challenged by some of the top administration and ruling coalition leaders — is part of Japan’s action based on what he called a common recognition among G-7 nations about the current risks to the global economy.
Abe acknowledged that the world economy today is not suffering from a Lehman-class shock, but runs the risk of losing a key driving engine due to the recent sharp deceleration in growth and investments in emerging economies such as China — and that these factors pose a new downside risk to Japan’s economy that might mean a return to protracted deflation. Saying that he accepts the criticism that he failed to honor his pledge before the 2014 election, Abe said he is making “a new judgment” on the economy in delaying the tax hike — for which he said he would seek a fresh public mandate in the July 10 Upper House election.
He may not need to worry about voters’ reaction to his tax decision. In a Kyodo News poll last weekend, 70 percent of the respondents said they support postponing the consumption tax hike, against 24 percent who oppose it, and the approval rating of his Cabinet surged to 55.3 percent. The same poll, however, showed that 64 percent of the respondents don’t think Abenomics will make the economy better.
Their poor evaluation of Abe’s economic policies is not groundless. Now in the fourth year of Abenomics, economic growth remains fragile and uneven. What the prime minister touted as the highest wage hikes this century for three years in a row — even as major companies basking in the benefits of the weak yen under his watch post record-level profits — have apparently not been high enough to offset the rising cost of living, especially since the April 2014 consumption tax hike.
The Abe administration may be justified in fearing that consumer spending would be hit even harder if the tax is hiked again next year. But there is no guarantee that spending will pick up just because the tax hike is postponed by another 30 months. Delaying the increase — which was supposed to help cover the mushrooming cost of the aging population while taming the public debt — needs to be accompanied by a candid assessment of why consumers are not spending more, and get to the bottom of the problem. Merely pledging to “accelerate Abenomics” will not be enough.