TOKYO: Japanese Prime Minister (PM) Shinzo Abe insists a sales tax hike due next year will go ahead as planned, barring a Lehman-like external shock. Analysts, including Izumi Devalier at HSBC, seem less than convinced.
An increase in the tax, while crucial for paring Japan’s bulging debt pile, risks imperiling a recovery that already appears to be stuttering amid tottering exports and the steepest decline in industrial output in half a decade, observers say.
“I think he’s laying down the groundwork to convince opponents that delivering another consumption tax when domestic demand is still fragile risks pushing Japan back into deflation,” Devalier, HSBC’s Japan economist, told CNBC on Wednesday.
Earlier this month, Abe met with Noble prize-winning economists Joseph Stiglitz and Paul Krugman for their assessment of Japan’s outlook and both of them urged Abe to postpone the hike and introduce more fiscal stimulus instead, Devalier pointed out, an opinion she shares as well.
The PM is using these meetings as a form of gai-atsu, or external pressure, to convince critics, namely the fiscal hawks within his ruling Liberal Democratic Party and technocrats at the Ministry of Finance, to delay the widely-opposed tax hike, Devalier said.
After getting elected in 2012, Abe promised to increase the consumption tax in two episodes in order to trim Japanese government debt—the highest among industrial nations at 250 percent of gross domestic product (GDP). In 2014, the first stage took effect, with the levy raised from 5 to 8 percent—a move that plunged the economy into recession and forced Abe to delay the second stage, which will take the tax to 10 percent, from October 2015 to April 2017.
If Devalier’s assumptions are true, it would mark a change of heart for the 61-year old leader who has long been preparing markets for an April move. In January, deputy PM Taro Aso said he will “certainly” go through with the second stage of the tax hike, adding that the government would even exclude food items to ease the blow on low-income individuals.
Now, poor consumption data and exports have led many analysts, including Devalier, to expect yet another delay despite the government’s latest fiscal stimulus package. On Tuesday, Parliament approved a record $852 billion budget for the coming fiscal year in a bid to spur spending.
“It would be a bad idea to move ahead [with the tax],” echoed Michael Kurtz, Nomura’s chief Asia equity strategist. “They should err on the side of doing what’s right for consumption; let the economy get back on its feet before you start taxing it again.”
Data this week showed in February household spending rising for the first time in six months, but the outlook remains bleak due to weak wage growth, a factor deemed essential for the world’s third-largest economy to hit its 2 percent inflation target. Data for January, the latest month available, revealed a 0.1 percent annual decline in the regular wage index, the first contraction in a year.
“Although Mr. Abe has remained steadfast in his assurance that a sales tax hike will take place, there is now some speculation that the government may delay the move in order to provide more stimulus for Japanese economy,” noted Boris Schlossberg, managing Director of FX strategy at BK Asset Management, in a Tuesday note.
However, any delay will be viewed as a sign of weakness by the market and could cause turbulence in Japanese fixed income market, which has already experienced severe volatility since the introduction of negative interest rates, Schlossberg continued.
Japan’s integrity is also at stake, pointed out Naomi Fink, CEO of Europacifica Consulting.
“We’ve already seen one delay in the planned hike. This is about restoring credibility in the face of record debt levels.”
Abe’s final decision on the tax issue is due sometime after May.
