Why Japan Is Risking a Tax Hike in a Slow Economy

While tax hikes are rarely popular anywhere, in Japan increases in the national sales tax have proved especially toxic, squelching economic growth and damaging political careers. Yet Prime Minister Shinzo Abe let the tax rise again on Oct. 1, after two delays, plowing on against a backdrop of escalating trade tensions. He has taken steps to soften the blow to consumers and says the government stands ready to do more to prop up growth if needed.

The government is looking to ease the world’s biggest debt load and strengthen the social safety net. Japan’s public debt has grown to more than twice the country’s annual gross domestic product as the cost of caring for its aging population balloons. (A higher proportion of Japan’s population is aged 65 or older than in any other country.) Lawmakers agreed in 2012 to double the tax rate to 10% in two stages (the first step, to 8%, came in 2014). That’s well below the 20% rate in the U.K. and on par with Australia’s 10%. In a bid to spread the benefits wider, some of the additional tax revenue this time will also be used to fund free preschool education and day care.