Some in BOJ Said to View Tax Delay as Helping CPI Campaign

  • Shift in thinking at BOJ compared with previous tax debates
  • Consensus hardening that economy can't cope with 2017 tax rise

Some Bank of Japan officials are increasingly seeing a potential delay to the 2017 sales-tax increase as a good thing for reaching the central bank’s inflation target, according to people familiar with the discussions.

This is a contrast from 2013 and 2014, the previous occasion when the government was debating whether to proceed with a rise in the levy on consumption. It’s also a contrast with BOJ Governor Haruhiko Kuroda, who has said publicly that the impact of a 2017 bump would be less than in 2014, when the economy slumped into a recession.

A number of BOJ officials view any postponement as helpful in the struggle to hit a 2 percent inflation rate in around the first half of the fiscal year that starts in April 2017, according to the people, who asked not to be named as the talks were private. The levy increase is planned to start in April 2017.

The discussions add to signs that the tide is turning toward a second delay to the increase in the consumption tax to 10 percent, from 8 percent. Prime Minister Shinzo Abe previously delayed it from the original October 2015 timeline. Japan’s economy is struggling to grow amid declines in household spending and a slide in exports thanks in part to China’s slowdown.

At the same time, some of the same BOJ officials consider it is tough to project the longer-term impact of a delay in the tax rise, because it could trigger a credit-rating downgrade that roils markets, according to the people familiar with the talks.

The debate on the tax decision, which is up to the Abe administration, has little bearing on the BOJ’s immediate policy decision due March 15. Most economists view the central bank as likely to keep its monetary stance unchanged next week, after the move to adopt negative interest rates in late January.

Kuroda and BOJ Deputy Governor Hiroshi Nakaso have signaled little appetite to lower the benchmark rate immediately. Nakaso said on March 3 that markets need time to digest the unexpected adoption of a negative rate on a portion of the cash commercial banks park at the BOJ. The change became effective little more than three weeks ago.

Stiglitz Coming

“It’s simple -- it’s better to avoid imposing higher taxes on households when a nation is struggling with deflation,” said Hiroshi Miyazaki, an economist at Mitsubishi UFJ Morgan Stanley in Tokyo. “There are always uncertainties over the impact of the sales tax, even though Kuroda says it will be OK.”

Expert panels assembled by Abe’s cabinet office are expected to address Japan’s tax question in coming weeks. Etsuro Honda, a senior aide to Abe, already has proposed a delay to April 2019 for the next sales-tax boost. Honda in 2014 set up a meeting between Abe and Nobel laureate Paul Krugman that helped convince the prime minister to put off the 2015 increase. Honda said another economist he had considered seeking the help of was Joseph Stiglitz.

Stiglitz, like Krugman a Nobel laureate and opponent of fiscal austerity, is scheduled to speak on the first expert panel, on March 16.

The last sales-tax increase, in April 2014, had a longer and deeper impact on consumption than anticipated, Abe said last week. Japan also suffered a recession in the wake of a 1997 sales-tax boost.

BOJ Deputy Governor Kikuo Iwata said Thursday in parliament that low oil prices and the impact of the 2014 sales tax hike have prevented the bank from reaching the 2 percent inflation target. In the parliamentary session, Finance Minister Taro Aso said he wants to proceed with the planned sales tax hike as Japan’s economic fundamentals are sound.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE