An adviser to the Bank of Japan and longtime colleague of its governor flagged a warning on the implications for monetary policy of any move by Prime Minister Shinzo Abe to delay next year’s sales-tax increase.
“The BOJ is buying a massive amount of bonds to lower yields and create inflation,” said Masahiro Kawai, who co-wrote an article with Haruhiko Kuroda calling for the BOJ to adopt an inflation target years before Kuroda took over the central bank. “By postponing the tax hike, Abe would lose fiscal trust, raise risk premiums and make the BOJ’s job much harder.”
Kawai, now a professor at the University of Tokyo, spoke in an interview in Tokyo yesterday after signs spread that Abe will call an early election next month to get public backing for a move to delay raising the consumption levy. While Abe-appointee Kuroda has repeatedly indicated his preference for the tax boost, other economists have called on Abe to put it off because of weakness in the economy, the world’s third-largest.
The BOJ adviser also joined the head of Japan’s biggest business lobby in calling on Abe to avoid an election, which isn’t due until 2016, and instead focusing on pursuing his growth-strategy program.
For the BOJ, efforts to rein in the nation’s debt burden are seen as a critical because of the degree to which the central bank is in effect financing the government’s borrowing. With its surprise expansion of monetary stimulus less than two weeks ago, the BOJ potentially may purchase from the market every new bond that the government issues.
“Abe should go ahead with raising the sales tax,” said Kawai, who was Kuroda’s deputy from 2001 to 2003 when the governor was head of foreign exchange policy at the finance ministry. “Abenomics started with unprecedented monetary stimulus and Abe would weaken the power of the easing by delaying it and hurting confidence in Japan’s finances.”
Abe adviser Etsuro Honda said today that the tax hike is out of the question if the economy grows less than 3.8 percent in the third quarter. Gross domestic product data will be released on Nov. 17, with the median of projections by economists for a rise of 2.8 percent.
The BOJ expanded its already-record stimulus further on Oct. 31, targeting an annual expansion in its bond holdings of 80 trillion yen ($691 billion). Economists including Takeshi Minami at Norinchukin Research Institute said the move was intended partly to push Abe to the tax increase by adding growth momentum.
Instead, the prime minister is looking at putting off the October 2015 sales-tax boost until 2017, the Sankei newspaper reported today. The levy was raised to 8 percent from 5 percent in April, tipping the economy into a quarterly contraction, and is scheduled to go to 10 percent next year.
Japanese lawmakers yesterday began preparations for a potential snap election as Abe faces hostility from consumers over the rising cost of living.
Abe has no time for an election, said Kawai, who co-wrote a 2002 opinion piece with Kuroda urging the BOJ to adopt a 3 percent inflation goal and boost the monetary base through asset purchases.
“Abe has mounting tasks to revive the economy,” Kawai said. “Rather than holding an election, Abe should allocate his energy for structural reforms like TPP and reinvigorating regional economies,” he said, referring to the U.S.-led Trans-Pacific Partnership trade talks.
Similarly, Sadayuki Sakakibara, the chairman of Keidanren, the country’s top business association, said yesterday that “there’s a huge buildup of policy issues right now.” Sakakibara said “what we want is for the government to concentrate on those.”
Abe said yesterday he hadn’t decided whether to proceed with any snap election. He has said he’ll decide whether to raise the sales tax by the end of December. Nobel laureate in economics Paul Krugman last week met with the prime minister and urged him to postpone the increase, citing concern it could hurt the economy, according to Abe aide Etsuro Honda, who was present.