Editorial Board

Abe's Next Step in Japan's Economic Recovery

Delaying a sales tax will help, but the prime minister needs to do more.

He can do even more.

Photographer: Kiyoshi Ota/Getty Images

Japanese Prime Minister Shinzo Abe’s reported postponement of a planned sales tax hike will surely be popular and is perfectly defensible. For it to be truly effective, however, Abe will have to make some harder decisions.

QuickTake Abenomics

The prime minister originally vowed not to backtrack on the tax hike -- already delayed once -- unless Japan faced a Lehman-style crisis. Although no such crisis appears imminent, the Japanese economy remains weak. Prices are falling again, and growth remains sluggish despite the Bank of Japan’s huge and increasingly unconventional monetary easing program. Rather than driving Japanese consumers to spend, the prospect of higher taxes seems to be encouraging them to save up.

The last two sales tax increases, separated by 17 years, both tipped an economy that looked to be recovering back into recession. There’s little reason to think a third wouldn’t do the same. It’s unlikely that a fragile global economy will have recovered enough by next spring, when the hike was to have taken effect, to offset a major drop in demand at home.

Abe’s reported plan for as much as 10 trillion yen (nearly $91 billion) in new spending is smart as well. After driving rates into negative territory, with mixed results, the BOJ doesn’t have much room to maneuver. If the stimulus money is directed at day-care programs and other measures that benefit younger workers, rather than simply more roads and bridges, it could help boost productivity and the number of women in the workforce.

Japan’s debt levels, while dizzyingly high, should be manageable for now given extraordinarily low rates. The government could ease some worries by looking harder for other ways to start bringing down the deficit.

Still, delaying the tax hike only postpones some pain. It won’t do much to alter Japan’s low-growth, low-inflation future. In recent months, a lack of urgency appears to have sapped whatever momentum existed for Abe’s structural reforms. The Trans-Pacific Partnership, meant in part as a wedge to crack open some of Japan’s most ossified sectors, has been stalled by politics in Washington.

Abe needs to regain the narrative. If his Liberal Democratic Party does well as expected in July’s upper-house elections, he should revive serious efforts at privatization and deregulating labor and product markets. He should look again at ways to increase desperately needed immigration and to put more pressure on companies to raise wages.

This is a familiar refrain. Unlike with the sales tax, though, further delay is unwise.