Abe Poised to Delay Unpopular Tax Hike Before Japan Election

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  • Prime minister to put off increase for 2 1/2 years, allies say
  • About-face is blow to efforts to contain Japan’s debt burden

Japanese Prime Minister Shinzo Abe is poised to delay an increase in Japan’s sales tax until 2019, and may also outline plans for a new economic stimulus package, complicating the government’s efforts to tame the world’s largest debt burden.

Abe is expected to confirm at a press conference in Tokyo at 6 p.m. his decision to postpone for a second time an increase in the consumption tax to 10 percent from eight percent.

The tax decision will mark an about-face for Abe, who had previously said only an economic shock on the scale of the Lehman Brothers collapse or a major earthquake would prompt a delay. The ruling parties approved the postponement Tuesday, after some expressions of doubt from senior officials.

QuickTake Abenomics

While putting off the increase in the unpopular tax may improve Abe’s prospects in the July election, the decision will fan doubts over the government’s ability to rein in a debt set to reach almost 2 1/2 times the size of the economy. Postponing the hike also will remove a source of funding for ballooning social security costs in one of the world’s most rapidly aging countries.

“Even though many people wanted the postponement, there were a lot of voices against it as well,” said Jun Okumura, a visiting scholar at the Meiji Institute for Global Affairs. “And people who were for the postponement would also realize that Abe was eating his words by deciding to postpone it.”

Abe laid the groundwork for the delay at Group of Seven summit in Japan last week. In a presentation to his fellow G-7 leaders, Abe put the case that the major economies needed to act to avert the danger of a major economic crisis. The G-7 leaders rejected his efforts to have language warning of the risk of a crisis included in the final communique of the meeting.

Tepid Growth

With economic growth tepid in Japan as consumers are reluctant to spend, Abe has opted to put off the increase before facing voters in an upper-house election in July. He had inherited the plan for the tax rise from the previous government.

The economy fell into recession when the tax was raised to 8 percent in 2014 in the first phase of the plan. The second increase initially was set for October 2015, before being delayed by Abe’s government.

“For Japan, the biggest problem is that private consumption hasn’t risen,” Finance Minister Taro Aso, who had previously opposed a delay, said Tuesday. “That’s 60 percent of GDP that isn’t increasing, and so to deal with that, now isn’t the time to raise the sales tax again.”

Fixing Finances

Aso added that Japan still must fix its finances and that there has been no change to the government’s target of achieving a primary balance surplus in the fiscal year starting April 2020. After being reported as saying last weekend that an election must also be called in the lower house to consult the people if the tax increase was delayed, Aso said Tuesday that election timing was entirely up to the prime minister.

Abe’s government is set to propose a stimulus package of 5-10 trillion yen ($45-$90 billion) in a special legislative session after the July election, the Nikkei newspaper reported Saturday.

Japan’s benchmark Topix index added 1 percent Tuesday to 1,379.80, its highest in a month, after Aso and other lawmakers confirmed the delay. It slid about 0.6 percent in early trade on Wednesday.

Almost two thirds of respondents to a poll published by the Nikkei newspaper Monday said they opposed the consumption tax increase.

Japan’s lower house rejected a no-confidence motion against Abe’s cabinet, submitted by opposition parties who said the Abenomics policy program had failed. Support for Abe’s cabinet rose to 56 percent in a poll published by the Nikkei newspaper Monday.

After Abe took office in 2012, drastic monetary easing weakened the yen, bolstering exporters’ profits and share prices, until the yen strengthened again in 2016. The economy has zigzagged between contraction and some growth, consumer spending is weak and inflation data last week showed that prices are falling again. Data released Tuesday showed a modest increase in factory output and a decline in household spending.