Abe Predecessor Warns of Market Turmoil If Sales Tax Not Raised

Prime Minister Shinzo Abe risks triggering market turmoil should he fail to raise Japan’s sales tax to 10 percent next year, his immediate predecessor warned.

The government needs to ride out the economic fallout after the levy was increased in April and lift it further as stipulated by law, Yoshihiko Noda, 57, a lawmaker in the opposition Democratic Party of Japan, said in an interview in Tokyo yesterday. “If it doesn’t, it would imply that Japan’s fiscal management strategy will collapse, and the market perception risks are huge.”

As prime minister, Noda passed legislation to raise the sales tax to help contain the world’s highest debt burden as welfare costs soar in the aging nation. While Abe will decide whether to proceed with the increase by the end of 2014 -- basing his call on the economy’s resilience in the third quarter -- Noda said he was worried about the government’s resolve.

“What the government is saying is extremely neutral and such a position is a bit of a regression in terms of executing the law,” Noda said. There’s a risk that politicians will put priority on coming elections over consideration of future generations, he said.

It would only be economically acceptable to delay a further increase should a financial crisis ensue or the economy worsen next quarter, Noda said. “Giving up for other reasons would raise doubts about Japan’s stance on fiscal consolidation.”

Noda pushed through a finance ministry-backed bill in August 2012 to double the tax in two stages from 5 percent. The legislation sparked a party revolt that led to more than 50 lawmakers fleeing his Democratic Party of Japan, and contributed to his lower-house election defeat to Abe that December.

Abe decided in October 2013 to proceed with the hike to 8 percent after seeking opinions from 60 economists, business leaders and consumer advocates on the issue.

Corporate Tax

Growth accelerated to an annualized 6.7 percent in the first three months of the year as consumer and business spending rose ahead of the April 1 tax increase. The economy will contract 3.5 percent this quarter before expanding 2 percent in the July-September period, according to a Bloomberg News survey.

A rebound in consumer confidence last month shows households may be weathering the higher levy even as wage growth lags inflation.

Abe plans to reduce corporate taxes from next April, and may give some indication of the size of cuts this month when the government unveils the second phase of its growth strategy.

Noda said he was skeptical that lower taxes on corporate profits would boost growth and tax revenue. “It’s a kind of voodoo economics,” he said.

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