You are here

Japan mulls second tax-hike delay as spending falls

37681429 - 08_03_2016 - JAPAN-ECONOMY_TAX.jpg
Japan's government has begun informally discussing a second delay to a hike in sales tax, as Prime Minister Shinzo Abe prepares for elections with household spending lower than when he came to office and still falling.

[TOKYO] Japan's government has begun informally discussing a second delay to a hike in sales tax, as Prime Minister Shinzo Abe prepares for elections with household spending lower than when he came to office and still falling.

With consumers in a funk and retailers struggling to raise prices, Mr Abe's efforts to lift the world's third-biggest economy clear of decades of deflation and stagnation are under threat.

For now, Mr Abe and the Finance Ministry insist that the tax will rise in 13 months to 10 per cent from 8 per cent, backed by many economists worried by Japan's enormous national debt, especially as moves are afoot to raise government spending ahead of summer elections for the Upper House of parliament.

But some bureaucrats and ruling party politicians are quietly starting to game-plan a second delay to the unpopular measure. "Considering the state of the Japanese economy, a delay is favourable," Mr Abe's economic adviser Etsuro Honda told Reuters.

Honda was among those who persuaded Mr Abe to put off the tax hike until April 2017.

Tax discussions remain preliminary, officials say, but the stirrings represent the bureaucracy's response to the changing mood that officials sense coming from Mr Abe's headquarters.

Another external adviser, Kyoto University's Satoshi Fujii, said a delay would be in line with the Group of 20's call last month for governments to use "all policy tools" to spur growth, and not rely too much on central bank money-printing.

Mr Abe raised the tax in 2014 to 8 per cent from 5 per cent, tipping Japan into recession.

He delayed the second stage of the planned increase, initially to have been last October, by a year and a half. "The sales tax hike dampened private consumption before wages and prices could ignite" and break Japan free from low growth and deflation, said Takeshi Minami, chief economist at Norinchukin Research Institute.

Mr Abe has long said he would only delay the hike again if Japan were to suffer a shock on the magnitude of the 2008 collapse of US investment bank Lehman Brothers bank, which ushered in the global financial crisis.

More recently, though, he said a global economic contraction could also force a rethink and that it would be meaningless to press ahead if it crimped tax revenue by choking the economy.


Mr Abe is already laying the groundwork for new government spending to offset weakness in household consumption. He is launching an advisory panel to consider an extra budget to fund further stimulus, even before next year's budget has cleared parliament.

Evidence from ongoing annual wage negotiations indicate this year's pay increases will not be enough to offset the tax-hike pain if it plays out like last time, said several government officials familiar with the discussions.

Price-adjusted wages fell 0.9 per cent last year, the fourth straight decline, and a Reuters survey last month showed that 84 per cent of big companies plan to raise pay less than 2 per cent this year.

Toyota Motor Corp's union, which sets the tone for wage talks across Japan, is demanding just 3,000 yen (S$36.50) extra in monthly base pay, half what it sought last year. "Sentiment right now is incomparably bad," said one official, citing government data and survey results.

A tax-hike delay, especially with fresh government spending, could inflame concerns about Japan's national debt, which at well over twice GDP is the heaviest in the industrial world.

"At this point I don't think the government can put out a package big enough to support the economy without triggering concerns," said Kim Eng Tan, Asia-Pacific senior director of sovereign ratings at Standard & Poor's, which rates Japan four notches below its top rating.

Proponents of delay say the loss of an estimated 5 trillion in revenue from the tax hike would be more than offset by the growth benefits of Mr Abe's stimulus policies. Since he came to office in December 2012, recovery has boosted tax revenues by 13 trillion yen, more than the 8 trillion yen attributed to his first tax hike.

That recovery is now threatened as consumers hunker down.

Household spending fell 3.1 per cent in January from a year earlier, deeper than expected and the fifth decline in a row.

Consumer spending, which accounts for 60 per cent of GDP, fell to its lowest since 2011 in the fourth quarter, having never picked up convincingly from the first sales-tax hike.

Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, fears "another lost decade" if Japan fails to boost growth now. "If the planned sales tax next year dampens the economy again, it could hurt people's sentiment and strengthen their sense of abandoning hope."


BT is now on Telegram!

For daily updates on weekdays and specially selected content for the weekend. Subscribe to