October 1, 2013

Abe commits to raising Japanese sales tax, but adds stimulus to go with it

In bumping the levy from 5 to 8 percent, Japan’s government will generate an estimated extra 8 trillion yen, roughly $80 billion, per year.

By Chico Harlan
The Washington Post

TOKYO - Prime Minister Shinzo Abe said Tuesday that Japan will pair a planned April tax increase with new stimulus spending, an attempt to ease the nation’s massive debt burden without tripping up its resurgent economy.

At a policy meeting, Abe confirmed that he will go ahead with the sales tax increase decreed last year by a previous government. But Abe, who has devoted much of his tenure to pulling Japan past two decades of deflation, added a series of measures to offset the initial shock, including new corporate incentives for investment and spending on infrastructure projects.

In bumping the levy from 5 to 8 percent, Japan’s government will generate an estimated extra 8 trillion yen, roughly $80 billion, per year. The bulk of that - 5 trillion yen - will be reinvested in the economy as part of the stimulus.

Economists say the moves highlight Abe’s strategy as he tries to turn a nascent recovery into a long-lasting one. Since Abe took office last December, drastic monetary easing and government spending have sparked a 40-percent rise in the stock market and profits for major exporters. Japan’s central bank said Tuesday that business sentiment among large manufacturers has reached its highest level since December 2007, before the global financial crisis.

But Japan is weighed down by decades of government spending, much of it less purposeful than that directed by Abe. Japan has the highest debt burden among developed countries, owing a sum more than twice the amount of its annual gross domestic product. And economists warn that Japan will be forced to borrow further as its population shrinks and its proportion of pensioners grows.

“I’ve concluded we can achieve a balance between economic revival and fiscal rehabilitation,” Abe said at an evening press conference, according to the Kyodo news agency. The tax increase, Abe said, would help ensure a “sound social security system” for future generations.

The International Monetary Fund projected in an August report that Japan’s economy would grow by 2 percent this year, with gradual inflation. But the same report said that Abe must also proceed with structural reforms and deregulation while putting together a longer-term plan for fiscal consolidation. The tax increase is “an essential first step,” the report said, but not sufficient by itself.

The tax hike was brokered by Abe’s predecessor, Yoshihiko Noda, who pushed the legislation through parliament but lost nearly all his political capital in the process. Tax increases have long been risky business in Japan. After the previous consumption tax increase, in 1997, Japan plunged into a recession, although it was linked to a broader, regional financial crisis. Still, it led to the ouster of then-Prime Minister Ryutaro Hashimoto.

Abe, analysts say, has more leeway than previous Japanese leaders to act as he wishes. After his party’s convincing election win in July, he might not face another leadership challenge for three years. His popularity has soared amid the early payoff from his economic strategy.

Given the signs of recovery and business sentiment, “we see little risk that a consumption tax hike would sink the economy,” Barclays Bank researchers said in a note to investors.

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