Japan′s Abe sticks to tax hike plans | Asia| An in-depth look at news from across the continent | DW | 31.03.2016
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Japan's Abe sticks to tax hike plans

Despite dire warnings, Japanese PM Shinzo Abe says he still plans to increase the consumption tax in April 2017. Nonetheless, he has given himself some wiggle room if he needs it. Julian Ryall reports.

Will he, or won't he? Shinzo Abe finds himself on the horns of a dilemma, obliged to make decisions on two closely intertwined issues that have the potential to eclipse the achievements of his administration over the past three years.

The first choice he must make is on whether to call a general election for both houses of the Japanese parliament this year. The second decision is whether he pushes ahead with the second part of a two-phase increase in the consumption tax, raising the rate from 8 to 10 percent.

The tax hike is due to be implemented in April of next year and Abe this week committed himself to sticking to that schedule, even though it is deeply unpopular with the electorate. An opinion poll conducted between March 19 and 20 by the Kyodo News press agency shows that more than 64 percent of the electorate oppose the plan.

A man walks past an electronic stock board showing Japan's Nikkei 225 in Tokyo, Friday, Jan. 29, 2016 (AP Photo/Eugene Hoshiko)

The tax hike is due to be implemented in April of next year

The Japanese PM will be mindful that standing by his convictions may hurt the performance of his Liberal Democratic Party at the ballot box. Failure to do so, on the other hand, will potentially make him look indecisive.

But perhaps the biggest concern has to be the impact of the tax hike on a national economy that is still struggling to get back on its feet.

Three-for-three recession

"When you look at the look at the consumption tax, Japan is three for three for sinking into recession within a couple of months of introducing the tax or increasing it," said Jesper Koll, CEO of WisdomTree Japan KK and former head of equity research at JP Morgan Chase & Co.

"I don't think there is much likelihood that this government will be able to avoid the same thing happening again," he told DW. "So at the moment, they are trying to modify the areas that will be subject to more tax and they are planning to exclude items such as fresh food.

"That will have an impact, but there is no escaping the fact that there is going to be volatility in spending habits forced by this tax hike," he said.

The last time that the consumption tax was raised, from 5 to 8 percent in April 2014, the consequences were clear. The public rushed out to replace refrigerators, televisions and other big-ticket items while also snapping up on anything they could stockpile. Inevitably, as soon as the tax rate rose, consumption plummeted and GDP was negative for three of the following five quarters.

Today, GDP is back in positive territory, but it is far from robust and another rate hike may see consumers acting in precisely the same way. "The economy is growing, but it's only at 0.6 percent so we're at the edge of recession," Martin Schulz, senior economist with the Fujitsu Research Institute, told DW.

International instability

"That is primarily because the overall international economy has deteriorated significantly and, as a consequence, Japanese exports are down and corporate investment is falling.

"Japan's second engine of growth, investment, is also slowing, so a tax hike will lead to an initial spike in consumer demand, but that will pass and we will once more be headed towards recession."

Although PM Abe is publically stating that the tax hike will go ahead as planned in April 2017, Schulz believes "it is extremely unlikely that it will take place as scheduled."

The consequences, he argues, will be just too much for the national economy to bear.

The analyst also points out that the government is constrained in its ability to maneuver by a national debt that has surpassed the figure of Y1 quadrillion ($8.94 trillion) and is running at more than 229 percent of GDP.

Positive signs

Koll remains, however, broadly upbeat about the state of the Japanese economy over the longer term.

People walk past clothes displayed outside a shop in Tokyo on August 29, 2014 (Photo: YOSHIKAZU TSUNO/AFP/Getty Images)

The consequences will be just too much for the national economy to bear, say experts

"Developments like these constantly go in cycles and, structurally, I believe there is very good reason to be optimistic about Japan and its economy," he said. "You must remember that this is a very innovative economy and it has at the moment a very tight labor market, meaning that purchasing power is going up.

"Technically, Japan may have fallen into a recession in the late autumn of last year, but I predict that by the latter part of this summer, Japan watchers are going to be quite surprised at how strong the pick-up is going to be," he said.

And while the Organization for Economic Cooperation and Development and other similar agencies are predicting weak growth of around 0.5 percent for Japan, Koll dismisses that notion and puts GDP growth in the bracket of 1.2 percent, and even possibly as high as 1.5 percent.