Krugman Urges Abe to Scrap Sales-Tax Increase, Boost Stimulus

  • Japan still hasn't escaped deflation, Nobel laureate says
  • Consumption tax is scheduled to rise to 10% in April 2017

Nobel prize winner Paul Krugman urged Japanese Prime Minister Shinzo Abe to abandon plans to raise the nation’s consumption tax next year and instead expand fiscal stimulus to revive the economy.

“Japan still has not achieved escape velocity in breaking out of the deflationary cycle,” Krugman told reporters late Tuesday in Tokyo after attending a panel discussion on the global economy with Abe and senior Japanese policy makers. “I would call for another round of fiscal stimulus.”

Krugman joins fellow economic laureate Joseph Stiglitz, who last week also recommended against the government going ahead with a plan to increase the nation’s sale tax in April next year. The current proposal is to boost the levy to 10 percent from 8 percent now, although food would be left at the existing level, in an effort to tackle the nation’s public debt.

Koichi Hamada, an economic policy adviser who attended the meeting, also said the prime minister should forgo the sales tax increase.

Krugman has already been influential in Japan’s tax debates after helping to convince Abe to delay increasing the levy, which was originally slated to be raised in October last year. Japan’s fiscal and monetary policies must push in the same direction, the economics professor said Tuesday.

“Japan needs fiscal policy to be reinforcing monetary policy, not fighting it,” Krugman said. He said that negative interest rates, which the Bank of Japan began implementing last month, are a “good idea” but of “limited effectiveness.”