Editorials

Economic promises versus the record

Most of the parties challenging Prime Minister Shinzo Abe’s ruling coalition in Sunday’s Lower House election have tried to make a difference by calling for either freezing or canceling the planned consumption tax hike to 10 percent in 2019. Abe says his administration will proceed with the hike — after postponing it twice already — but will divert part of the revenue from the tax increase to education and other policy programs, instead of repaying government debt. At the same time, the prime minister is deemed to have left some room for once again postponing the hike, noting that the tax would be raised unless there is an economic crisis of the magnitude of the 2008 Lehman shock — a condition that he was also citing before he put off the hike to 2019 last year.

A consumption tax hike, however, is only one of the many components of an economic policy. Voters need to make a comprehensive judgment on the policies pitched by each of the parties during the campaign. They should also review the nearly five years of Abenomics and what changes it brought to the economy and their lives as they cast their ballots.

Since Abe returned to power in December 2012, Japan’s economy is believed to be in the second-longest expansionary streak in the nation’s postwar history. Gross domestic product has grown for six quarters in a row, the longest in 11 years. Aided by the yen’s weakness — induced by the Bank of Japan’s monetary easing — and robust overseas demand, major firms enjoy record profits. The Nikkei average on the Tokyo Stock Exchange more than doubled under Abe’s watch to hit a 21-year high this week. The business confidence of major manufacturers in the latest Bank of Japan survey is on a 10-year high. The number of people on payrolls increased by more than 3 million, and the labor market is the tightest in decades amid an increasing manpower supply shortage.

Still, consumer spending, which accounts for 60 percent of the GDP, remains weak as wages stagnate. Inflation-adjusted net wages remain below the levels when Abe’s current administration was launched. It is questionable whether households in general, with their continuing tendency to save on expenses due to concern over future livelihood, share the sense that the economy is in such a good shape.

The 2 percent annual inflation target — set by the Bank of Japan in 2013 as it embarked on the massive monetary stimulus program in order to bust deflation — is still nowhere to be seen. It may be hard to foresee whether in two years’ time the economy will be robust enough to withstand the next consumption tax hike — unlike the previous hike to 8 percent in 2014, which plunged personal consumption into a protracted slump. The doubts being cast over a consumption tax hike two years ahead — even after being delayed by four years — seem to highlight the fragility and mixed picture of the economy.

Noting that the economy is on a steady path of recovery, Abe and his Liberal Democratic Party emphasize that they would “accelerate” the Abenomics policies to make sure that Japan is finally out of deflation. Opposition parties charge that the state of the economy shows Abenomics has been a failure, although they have not been able to come up with convincingly detailed alternatives to accomplish what Abenomics has not been able to achieve.

The upstart Kibo no To (Party of Hope), launched by Tokyo Gov. Yuriko Koike and absorbing many lawmakers from the former top opposition force, the Democratic Party, pledges to freeze the next consumption tax hike to avert yet another setback to consumer spending. However, the party’s call for taxing the retained earnings of companies — the subject of frequent criticism that businesses are piling up profits without spending enough on capital investments or increasing employees’ wages — to cover the revenue shortfall from a consumption tax hike freeze is problematic in that such a measure, combined with the corporate tax, would result in double taxation and could end up deterring, instead of prompting, business investment.

Voters also need to assess the ruling coalition’s policy on the consumption tax along with its consequences. In unveiling the plan to divert the revenue from the next consumption tax hike to increase public funding on education — for which the prime minister said he was seeking a fresh mandate of voters in the coming election, Abe acknowledged that the government’s target of achieving a primary balance surplus — a condition in which the government would be able to finance its policy-related spending without incurring new debt — in fiscal 2020 would now be out of reach. Abe said he has not given up on fiscal consolidation. If so, he needs to quickly come up with a new target for achieving the milestone.

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