NEW YORK – With the economy softening, the Bank of Japan needs to at least consider further steps to support growth. There’s one major hurdle, however, and only Prime Minister Shinzo Abe can remove it.
The 2 percent hike in the consumption tax scheduled for October would shore up Japan’s fiscal position and thus its ability to pay for an aging population. Yet this plan hampers the central bank’s ability to weigh additional stimulus. Any admission by the BOJ that things are looking bleak would undercut the case for going forward with the tax rise and put the bank squarely in the middle of a domestic political squabble. Central banks the world over are wary of that gray zone.
It’s time for Abe to break the deadlock by postponing the hike.
The increase risks pulling the economy in the wrong direction at the wrong time. Monetary policy is drifting, growth is slackening and inflation isn’t close to the hallowed 2 percent target. The BOJ needs more flexibility to address these problems.
While Abe loaded the planned tax hike with exemptions and pledged to devote some of the revenue to education, it’s becoming a trickier sell politically, too. The ruling party, for one, may not even want it, despite the best efforts of government ministers to defend it.
Back in February, the tax increase already had a target painted on its back. The fallout from China’s slowdown and the U.S. trade war with Beijing was just beginning to bite. With the global slowdown, economists are now flagging a possible contraction in gross domestic product later this year. That target keeps getting bigger.
The last hike, in 2014, was widely blamed for pushing the economy into recession. That has made lawmakers skittish about another increase; a top official from Abe’s Liberal Democratic Party, Koichi Hagiuda, was probably speaking for many when he said last week the economy may be too weak to proceed with the hike. The Cabinet went into damage-control mode and Hagiuda dutifully walked back his remarks. But Hagiuda isn’t some obscure backbencher; he’s the acting secretary-general of the LDP. I doubt he simply misspoke.
True, there’s never a grand time for a tax hike. Japan’s society is aging and its workforce is shrinking, meaning income taxes won’t be sufficient to support the things Japanese people want and have come to expect: great infrastructure and a social safety net.
But some times are worse than others. Abe likely regrets saying last year that only a Lehman-style slump would defer a tax increase. There’s little chance of a cataclysm on that scale occurring between now and October. No matter: He should admit defeat on this one, and soften the blow by packaging the move as an insurance policy against a deeper economic chasm. Watch for Abe-aligned politicians to start talking about a dimmer outlook.
As for the BOJ, it trimmed its growth forecasts at its monthly meeting Thursday and BOJ Gov. Haruhiko Kuroda vowed not to raise interest rates before at least the spring of 2020 and cautioned, “the timeframe could be much longer than that.” As for the consumption tax hike, Kuroda can fudge on that for a while, but not for too long. Come on, Abe. Give a central banker a break.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.