Abe Postpones Japan's Sales-Tax Hike Until Late in 2019

  • Delays unpopular rise in consumption tax to 2019 from 2017
  • Abe pledges bold economic measures in fall, few details given

Japan Delays Sales Tax Hike for 2.5 Years

Prime Minister Shinzo Abe said he’ll delay an increase in Japan’s sales tax until 2019, a move intended to support struggling households ahead of an election this summer.

The decision marks an about-face for Abe, who had vowed his policies would make the economy strong enough to withstand an increase in the consumption tax. He had repeatedly said that only an economic shock on the scale of the Lehman Brothers collapse or a major earthquake would prompt a delay.

“I decided that I should delay the sales tax increase because it might damage domestic demand,” Abe said in a press conference Wednesday in Tokyo. “China and other countries are slow to deal with excess capacity and structural problems and it may take time for emerging economies to recover. In that context, there are concerns about long-term stagnation in global demand, so I thought I should delay it as long as possible.”

Abe said he took seriously his responsibility for changing direction, but decided against calling a general election over the issue, instead seeking the electorate’s verdict through the upper house election. He announced that vote will be held July 10.

He also promised to take “broad, bold” measures -- which he didn’t specify -- to support the economy in the autumn. The bill to delay the tax increase also will be submitted then, he said.

Rein in Debt

The tax hike to 10 percent from 8 percent, which was set to take effect in April 2017, will be pushed to October 2019. While putting off the increase in the unpopular levy may improve Abe’s prospects in the upper house election, the decision will fan doubts over the government’s ability to rein in a debt burden set to reach almost two and a half 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. Cabinet Office forecasts have shown that Japan would fail to meet its fiscal targets even if it introduced the tax increase as planned.

“I will not lower the flag of fiscal reconstruction,” Abe said. “We must ensure international faith in our country. And we will fulfill our duty to pass on the social security system to the next generation.” He said he would maintain a pledge to get the primary balance into the black by 2020.

Abe laid the groundwork for the delay at a Group of Seven summit in Japan last week. In a presentation to his fellow G-7 leaders, Abe made 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.

Opposition to Increase

Abe’s cabinet had inherited the plan for a two-stage tax rise from the previous government. The economy fell into recession when the tax was raised 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. A poll published by the Nikkei newspaper on Monday showed that nearly two-thirds of respondents opposed next year’s hike.

“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.”

The opposition Democratic Party earlier this month had called for a two-year delay in the tax increase, citing the failure of Abe’s economic policies. Opposition leader Katsuya Okada called on the cabinet to resign for failing to keep its pledge not to postpone the tax increase a second time.

Watch next: Was Abe Right to Delay Japan’s Tax Hike?

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.

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