Japan Lawmakers Discuss Big Stimulus to Offset 2017 Tax Hikeby , , and
Senior legislator Yamamoto now says go ahead with tax rise
Debate may now shift to size, shape of fiscal packages
Japan’s debate over whether to go ahead with a 2017 sales-tax increase is shifting in the wake of stabilization in global financial markets and signs of resilience in its economy.
While a soaring yen, falling stocks and indications of yet another Japanese recession spurred recommendations earlier this year to put off the April 2017 tax hike, those dynamics have now changed. Some ruling-party lawmakers are instead proposing to let the scheduled boost in the consumption levy to 10 percent from 8 percent proceed, and to address any hit to the economy through an enlarged fiscal package.
One senior Liberal Democratic Party legislator who has advised Prime Minister Shinzo Abe plans to submit a proposal Friday for as much as an extra 30 trillion yen ($273 billion) in supplementary fiscal measures over the 2016 and 2017 fiscal years. The presentation from Kozo Yamamoto and his group of LDP supporters is designed to enable the tax rise go ahead, and address damage from this year’s earthquake in southern Japan.
Hours after the idea was made public, however, another of Abe’s counselors reiterated his argument that the increase should be put off until the economy completely escapes deflation. Etsuro Honda said in a telephone interview it’s clear from experience in 2014 that an economic package cannot offset the impact of the tax rise.
Yamamoto said in a brief interview that his fiscal plan would have the same impact as a two-year delay in the tax boost, and that continued uncertainty about the matter itself has a large negative impact. In the written proposal, Yamamoto said that "it is obvious that simply announcing a delay will not improve the economy," and urged "policies that bolster weak demand."
Though Abe had repeatedly said only a Lehman bankruptcy-like shock would trigger a halt to the 2017 tax rise, he had also convened economic advisory panels where calls for a delay were aired. The narrative among a number of Abe advisers and Japan economists had for months been that the prime minister would use his leadership of the Group of Seven this year to help shape a decision to put off the sales-tax boost.
G-7 expressions of concern about sluggish global growth, along with a deepening worry about excessive use of monetary policy, could have offered a rationale for Japan to make a fiscal contribution through avoiding the tax increase. Japan’s Finance Ministry has long lobbied for higher consumption taxes to help rein in the nation’s government debt load -- the world’s largest.
Japan’s initial estimate of gross domestic product for the first quarter showed a better-than-forecast performance, potentially influencing the country’s fiscal discussions. The 1.7 percent annualized gain from the previous three months even exceeded the 0.5 percent expansion in the U.S., which is contemplating tightening monetary policy.
The call from Yamamoto and his allies comes just as Japan’s G-7 leadership kicks into high gear, with finance ministers and central bank governors from the group of advanced economies gathering Friday near Sendai in the north of the country. Those sessions end Saturday. Abe hosts the G-7 summit May 26-27.
"The entire tax hike could be effectively be nullified by increased expenditure," Daiju Aoki, an economist at UBS Group AG in Tokyo, wrote in a note this week. "If the consumption tax hike goes ahead as planned, a preemptive demand rush will start to emerge in the second half of the financial year, so the purpose of any supplementary budget would be to support a dip in the economy from April 2017."
Another implication: the Bank of Japan may take action to help cushion the impact of the tax increase, Aoki said. When Japan boosted the levy to 8 percent from 5 percent in 2014, it tipped the economy into a recession. That was an echo of what happened on the previous occasion, in 1997.
Aoki, writing before the Friday news on Yamamoto’s proposal, still considered the chance of a postponement "high."
The recommendation to go ahead with the tax rise from Yamamoto, who helped to convince Abe while in the political opposition to embrace a reflation manifesto, marks a change in his stance. As recently as April, he even suggested an argument could be made for cutting the sales tax, given weakness in consumption.
His proposals are:
- To increase the sales tax as planned to 10 percent in April 2017 and not to raise it further for some time
- Extra spending of 10 trillion yen for economic stimulus and 5-10 trillion yen for revival of the quake-hit Kumamoto prefecture in fiscal 2016, which ends in March.
- Extra spending of 10 trillion yen in fiscal 2017 and 7 trillion yen in fiscal 2018
- About 4 trillion yen of those funds to be spent on sales-tax rebates and the remainder on public investment
- Funds to be raised via bond issuance, taking advantage of negative interest rates