Japan Sales-Tax Debate Looming for Abe After Election

Shinzo Abe's Monetary Policy Advisor Koichi Hamada
Koichi Hamada, monetary policy advisor to Japan's Prime Minister Shinzo Abe. Source: Yale University via Bloomberg

Koichi Hamada, an adviser to Prime Minister Shinzo Abe, said that he was cautious about increasing Japan’s sales tax soon, signaling Abe will face debate over the planned move after a forecast election victory this weekend.

“It is possible to postpone,” Hamada said at a gathering of business leaders in Karuizawa, Nagano, today, referring to a plan to increase the levy in April next year. “I think it is necessary to let people know about this,” he said, adding that “it is the prime minister’s decision.”

Abe needs to shore up the finances of a nation bearing a debt load more than twice the size of gross domestic product without choking off the recovery by damping consumption. Justice Minister Sadakazu Tanigaki, a former leader of Abe’s Liberal Democratic Party, said July 16 that talk of delaying the sales-tax increase was dangerous because Abenomics was built on the assumption that the levy would rise.

“After the election, Abe may find that a sales-tax increase isn’t the consensus of the entire LDP and he may be forced to become careful in pushing through the policy,” said Hideo Kumano, chief economist at Daiichi Life Research Institute and a former Bank of Japan official. “Debates to examine the need for a higher sales tax may surface following an election,” he said.

Stimulus Measures

While Japan needs to raise the consumption tax in the medium or long term, the move would be a shock for the economy, said Hamada, who advised on monetary policy as Abe developed the package of policies called Abenomics.

The Topix slid 0.9 percent at 2:17 p.m. in Tokyo, after swinging between a gain of 0.8 percent and a loss of 1.9 percent.

“The need for fiscal consolidation is shared globally and Abe has no choice but to increase the sales tax in order to improve Japan’s fiscal situation,” said Junko Nishioka, chief economist at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan official.

Fiscal stimulus and the Bank of Japan’s unprecedented monetary easing jump-started the recovery of an economy stuck in a 15-year deflationary malaise. The 5 percent sales tax is due to increase to 8 percent in April and 10 percent in 2015. Economists forecast the economy to contract after the April increase.

Reform Critics

Abe is set to win control of both houses of parliament, giving the LDP-led coalition the strongest grip on power since 2007. The LDP and its coalition partner New Komeito are on track to win more than 65 of the 121 upper house seats up for grabs, according to a poll published in the Nikkei newspaper this week. Added to the coalition’s 59 seats in the uncontested half of the chamber, it will have a majority for the first time since 2007.

Even with an election victory, the administration will face the harder part of implementing Abenomics, Julian Jessop, an economist at London-based Capital Economics Ltd., wrote in a report. Critics of reform within the LDP, including the agricultural lobby and opponents of the Trans-Pacific Partnership free trade agreement, may feel freer to speak out after the poll. “It will not be plain sailing once the voting is out of the way,” Jessop said.

Reform in areas from agriculture to labor markets will be difficult politically to push through, said Rintaro Tamaki, deputy secretary general at the Organization For Economic Co-operation & Development and a former top currency official at Japan’s Ministry of Finance. “Any reform cannot be easy,” Tamaki said in an interview in Singapore today.

Final Decision

Japan’s economy is forecast to contract by 4.4 percent on an annualized basis in the second quarter of 2014, when a 3 percentage point sales-tax increase is scheduled to take effect, according to the median forecast of 29 economists in a Bloomberg News survey.

Abe said July 4 that it’s necessary to increase the consumption tax because of rising social-security costs and the nation’s debt burden. He has said that he’ll consider economic conditions when making a final decision.

Abe has benefited from an opposition in disarray with the Democratic Party of Japan undermined by factional splits and an inability to set a clear policy platform. A poll published by the Mainichi newspaper on July 15 found support for Abe at 55 percent, down from 70 percent in March. The paper surveyed 934 people by phone July 13-14 and gave no margin of error.

Elsewhere in the world today, Germany releases producer-price inflation numbers, while Canada’s consumer price index will show a faster year-over-year increase for the month, based on Bloomberg News surveys of economists.

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