July 25 (Bloomberg) -- Japanese Prime Minister Shinzo Abe, now sitting on the biggest parliamentary majority in six years, faces the threat of political dissent within months as a planned sales-tax rise threatens to arrest an economic rebound.
The world’s third-largest economy has 30 percent odds of tipping into the fourth recession since 2008 should Abe bump the consumption levy to 8 percent in April from 5 percent, according to the median of 23 estimates in a Bloomberg News survey. He’ll need a 5 trillion yen ($50 billion) fiscal package to cushion the impact of the increase, the survey showed.
Deteriorating growth would counter Abe’s promise to revive Japan from two decades of economic malaise, which swept his Liberal Democratic Party to power in December and won it a majority in the Diet’s upper house this month. At the same time, failing to implement the tax boost risks undermining confidence in Japan’s pledges to rein in the world’s largest debt burden.
“The market would raise a question mark about Abenomics if the economy fell into a recession after raising the sales tax,” said Yoshimasa Maruyama, chief economist at trading company Itochu Corp. in Tokyo. “Members of Abe’s ruling party will request extra spending -- especially people who represent sectors that will be badly affected by deregulation and the TPP free-trade negotiation.”
The Topix index was down 1 percent in the morning session, paring its gain since Abe took office to almost 43 percent. The yen traded at 100.13 per dollar at 12:18 p.m. in Tokyo.
Abe, 58, has already sown division in the ruling party with promises of structural reforms that include joining the U.S.-led Trans Pacific Partnership trade talks, which could open up Japan’s agriculture to greater competition. Former Health Minister Hidehisa Otsuji, who won a seat in the July 21 election for the LDP, already put Abe on notice he’ll oppose TPP, the Sankei newspaper reported this week.
The prime minister -- who has championed monetary and fiscal stimulus, along with deregulation, as his three-pronged strategy to end deflation and lift growth -- was bequeathed the sales-tax increase. His predecessor as LDP chief negotiated with the then-governing Democratic Party of Japan to pass legislation for a two-stage boost to the levy, to 10 percent in 2015.
The legislation gave the government an opt out should the economy not be judged strong enough. Toshifumi Suzuki, chairman of Tokyo-based retailer Seven & I Holdings Co., said in a statement this week that “if we misread the timing for raising the sales tax, it would seriously affect consumer spending and damage the economy, which has just started to improve.”
Gross domestic product rose 4.1 percent in the first quarter on an annualized basis. Finance Minister Taro Aso said two days ago that the government will make its final call on whether to proceed with the tax increase after the second estimate of second-quarter GDP, which is scheduled for release Sept. 9. The first calculation comes Aug. 12.
Aso told Japan’s Group of 20 partners on July 20 that his nation will craft a credible fiscal plan before a G-20 meeting in September. Japanese officials are trying to contain a national debt that the International Monetary Fund projects will reach 245 percent of the economy this year.
The government’s coalition partner, the New Komeito party, has called for a lower tax rate on daily necessities to ease the impact. Lawmakers also probably will debate relief for auto and home purchases, according to Bank of America Merrill Lynch.
“The weaker the readings on the state of the economy, the more the LDP is likely to be amenable to the pleadings of the Komeito and others,” Naoki Kamiyama, an equity strategist at Bank of America Merrill Lynch in Tokyo, wrote in a July 22 note. Individual stocks and sectors may be affected by any relief measures that are approved, he wrote.
Last time round, when Japan boosted the sales tax to 5 percent from 3 percent in 1997, the move contributed to pushing the economy into a 20-month recession, costing then-Prime Minister Ryutaro Hashimoto his job.
This time, GDP will contract an annualized 4.4 percent in the April-to-June period, before returning to growth in the third quarter of 2014, according to the median estimate of economists surveyed by Bloomberg News.
Some are pricing in an outright recession of two straight quarters of decline -- among them Barclays Plc economists led by Kyohei Morita in Tokyo.
There is a “risk that political stability will be undermined if there is a setback in relation to the consumption tax hike,” Barclays analysts wrote in a note this week. “Some LDP lawmakers have already taken an explicitly cautious stance, which could lead to internal splits.”
Any tax debate poses a distraction for Abe from the structural reforms he plans to begin unveiling in coming months, legislation he has promised will enlarge business opportunities that have been dulled by a declining population and falling consumer prices.
Abe may decide to put off any corporate income-tax cut until after the sales tax has been implemented in full in 2015, Kamiyama said. The government may limit corporate measures to a new tax break on capital spending, according to a research report this week by economists Hiromichi Shirakawa and Takashi Shiono at Credit Suisse Group AG.
“Raising the sales tax is a problem that Abe must overcome,” said Kamiyama. “There will be negative effects next year but the government will use an extra budget to lessen its impact.”
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