Japan Sales Tax Delay Seen Likely as G-7 Offers Abe Cover

  • Panel of experts could serve as platform for calls for delay
  • Abe adviser proposed putting off rise to 2019, from 2017

As Prime Minister Shinzo Abe nears a decision on whether to go ahead with a 2017 sales-tax increase, Japan’s hosting of the Group of Seven has offered him cover for putting off the hit to consumers.

Japan already signed on to a pledge by the larger Group of 20 last week to “use fiscal policy flexibly” to bolster growth, while ensuring debt levels are sustainable. Now, Abe has called for a panel of experts to discuss growing concern about the global economy ahead of the May G-7 summit he will host.

Abe repeatedly has said only a major shock, such as the 2008 post-Lehman crisis, would warrant putting off the 2 percentage-point bump in the consumption levy. Focusing attention on worsening global prospects, and calls from quarters including the International Monetary Fund for stimulus, could help Abe overcome pressure to go ahead with the tax from Japan’s Finance Ministry and lawmakers who support the increase to rein in the nation’s debt.

The pre-G-7 panel will present the opportunity of globally famous economic experts to say Japan should put off the move scheduled for April 2017, according to a government official who asked not to be identified as he’s not authorized to speak publicly.

“Abe has re-launched his proven process to delay the consumption tax increase,” Stephen Church, an associate research partner at Haitong International Japaninvest in Tokyo, wrote in a March 2 note. Church noted that in 2014, Abe also set up a panel of experts ahead of his decision to postpone the increase, initially scheduled for October 2015. The sequence “appears to be rolling again,” he wrote.

Japan’s Real GDP

This would be the second delay in the sales tax, which initially was scheduled for October 2015 and is now set for April 2017. Foreign guidance played a role in Abe’s first delay, with Nobel laureate Paul Krugman helping persuade the prime minister against proceeding.

Abe Advisers

Some of Abe’s advisers have called for a postponement, citing continuing weakness in the economy three years into the Abenomics program. Senior aide Etsuro Honda has proposed a delay to April 2019 for the step-up to a 10 percent consumption levy.

One scenario is for Abe to announce the delay and call an election of the lower house of parliament, which determines the government, to get a fresh mandate from voters. That would be a replay of last time, when a little less than a year before the tax increase Abe called a ballot and postponed the levy. There is an election to the Diet’s upper house set for July, enhancing the appeal of an early vote given disarray among opposition parties.

Foreign influence, or gaiatsu in Japanese, has long played a significant role in Japanese policy making. The G-7 gathering, which will be preceded by a meeting of the finance ministers and central bank governors of the world’s top seven advanced nations, gives Abe a platform for presenting Japan’s contributions to a global economy still struggling for momentum.

Monetary Stance

With Japan’s monetary policy having come under some flack at the G-20 finance chiefs’ gathering last week, fiscal initiatives could help change the international narrative about Japan. For his part, Bank of Japan Deputy Governor Hiroshi Nakaso in a speech Thursday urged the government to double down on structural reforms to strengthen growth.

The prime minister himself has flagged -- including in remarks Thursday to lawmakers -- that Japan’s consumption suffered more, and for a longer period, than anticipated after the last sales-tax increase in April 2014. That was despite a fiscal package crafted to cushion the blow, following the experience of 1997, when an increase contributed to a recession. 

This time, lawmakers have been debating how to alleviate the blow by exempting some items -- like food. A ruling Liberal Democratic Party lawmaker familiar with the discussions said in late January that if those tweaks weren’t ready, the increase shouldn’t go ahead.

Meanwhile, parallel efforts have been under way by some lawmakers to propose a supplementary budget package to help Japan’s economy, which has contracted in four of the past seven quarters. One hurdle for swift action: the budget that the package would supplement, for the fiscal year starting April 1, hasn’t been completed.

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