Abe delays tax hike and calls snap election in bold but risky strategy

Tokyo

TAKING what is widely seen as the biggest gamble of his political career, Japanese Prime Minister Shinzo Abe is postponing a further rise in the national sales tax and calling a snap general election to secure the verdict of voters on the highly controversial decision.

Mr Abe acknowledged that recovery of the economy had stalled owing to the April consumption tax hike but promised early fiscal stimulus to carry regional economies, and smaller firms especially, through the slowdown, while also vowing to continue the battle against deflation.

He said on Tuesday that the public could deliver its verdict on his policies at next month's polls and pledged to resign should his government fail to secure a fresh four-year mandate. Mr Abe said that he was confident of international understanding for delaying the October 2015 tax hike, but said that the hike would "definitely" go ahead in 2017.

He struck a defiant rather than defensive attitude at a televised press conference. "I am aware that critics say 'Abenomics' is a failure and not working but I have not heard one concrete idea what to do instead," he said. Abenomics is the only way to end deflation and revive the economy, he insisted.

He also pledged to stick to the fiscal goal of restoring a primary balance (where basic tax revenues match expenditures minus debt service costs) by 2020 despite growing international concerns over whether the government can manage its huge and still mounting debt burden.

While some saw the snap election as risky and likely to cost Mr Abe's ruling Liberal Democratic Party seats - even though an LDP victory at the polls looks to be assured - others viewed it as a bold move to put economic growth ahead of international concerns over Japan's fiscal health

Parliamentary opposition forces, led by the Democratic Party of Japan are gearing up now to, if not defeat the LDP-led coalition, at least reduce its strong majority in the lower house of Parliament significantly by claiming that Abenomics has "failed".

Mr Abe confirmed at a briefing on Tuesday that he is postponing the October tax hike to April 2017, and that he will dissolve the House of Representatives on Friday and call an election, expected to be on Dec 14.

Financial markets appeared to approve of Mr Abe's determination to tough out the Opposition, despite strong warnings from international organisations such as the IMF and OECD that Japan could be courting a fiscal crisis, and in the face of criticism from opposition parties and even from within his own party.

The Nikkei 225 stock average clawed back most of the 3 per cent drop it suffered on Monday on news that the economy had slid back into recession, contracting for the second time in a row in the third quarter, due mainly to a slump in consumption following the April hike.

The Nikkei index ended up 370.26 points, or 2.18 per cent, from Monday at 17,344.06 while the yen slipped back to near a seven-year nadir in the lower 116 range against the dollar on expectations that Mr Abe would secure a new, four-year mandate and that his Abenomics policies will remain on track.

"Team Abe remains very focused on delivering pro-growth policies," Jesper Koll, managing director of research at JP Morgan Chase Bank in Tokyo, told The Business Times.

With the threat of the 2015 hike now lifted, the government is hoping that consumer sentiment would recover and put the world's third-largest economy back onto a growth track.

Mr Abe has defied critics that had urged him to go ahead with another rise in the sales tax (to 10 per cent) even in the face of a further possible slump in consumption. But he is likely to offer compromises, analysts said.

These could take the form of removing an existing legislative clause which makes the tax hike conditional on the state of the economy, Finance Minister Taro Aso said on Tuesday while emphasising that an eventual tax hike is "inevitable". Some "guarantee" of a rise is essential, he said.

The Bank of Japan is expected to reaffirm its continuing monetary support for the Abe government's policies when its Policy Board meets on Wednesday, even though governor Haruhiko Kuroda is among those who are pushing for the tax hike to go ahead.

Etsuro Honda, one of Mr Abe's principal economic advisers, said on Tuesday that there was no need for the BOJ to ease policy further now following its recent dramatic moves in this direction. Japan is still in "mild recovery", with the third-quarter contraction being due to inventory adjustments, Mr Honda asserted.

Another Abe adviser, Koichi Hamada, a Yale university economic professor, also said that he was not "too worried" over the contraction, which he attributed largely to an unduly large and rapid increase in the consumption tax - to 8 per cent from 5 per cent - in April.

Chief Cabinet Secretary Yoshihide Suga meanwhile told a press conference on Tuesday that Abenomics had put the economy on a recovery track and that a series of positive data recently reflect the success of the policies.

Kyodo reported him as saying that "Abenomics enabled us to revitalise the economy and raise the consumption tax rate, leading to new tax revenue of over eight trillion yen (S$89 billion)". "The economy shrank in July-September due in part to the summer's bad weather, but overall it is gradually recovering."