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Delay in consumption tax rate increase?

Prime Minister Shinzo Abe’s remarks, concerning plans to raise the consumption tax rate to 10% starting in April 2017, are causing nervous stirrings at the Ministry of Finance. He has previously stated that implementation of the promised tax rate increase will proceed as planned, short of a major crisis along the lines of the Lehman Shock in 2008 or a catastrophic natural disaster. Of late, however, he has begun making reference to the “major contraction of the world’s economy.” At the same time, opinions favoring postponing the rate increase are being heard within the ruling Liberal Democratic Party and elsewhere. Thus, there is growing concern in the ministry that a postponement, if allowed, might become a habitual practice.

While having repeatedly asserted that the tax rate increase would be implemented, on February 19 he remarked that the previous tax rate hike to 8% had “seriously impacted” personal consumption. Then, during budgetary deliberations in the House of Representatives (lower house) a week later, he remarked that the tax rate increase might be postponed should the world economy contract.

The Cabinet now appears to favor postponing the increase, particularly considering the upcoming double election in summer.

Nevertheless, in a meeting of the lower house budgetary committee on March 3, Abe made no reference to “economic contractions,” instead saying, “we’ll proceed with the increase for now,” barring a major financial or natural crisis. Although the Ministry of Finance might have felt a sense of relief, it is still trying to discern Abe’s intentions, since the ultimate decision rests with him.

Nobel Laureate Joseph Stiglitz. PHOTO: ME JUDICE

Nobel Laureate Joseph Stiglitz.


Is Nobel Laureates’ invitation a strategic tax move?

Nobuteru Ishihara, on assuming the post of Minister of State for Economic Revitalization earlier this year, initiated a series of meetings on international finance and the global economy. The meetings offer Prime Minister Shinzo Abe and various experts a chance to exchange views on the global economy in the lead up to the G7 summit, set for late May in Ise-shima.

Also invited to attend the meetings are the recipients of the Nobel Prize in Economics, whose thinking closely corresponds with Abenomics. Since the laureates support prioritizing economic growth, the view has arisen that including them in the meetings is a strategic move leading to the postponement of the consumption tax rate hike to 10%.

The first meeting, held on March 16, was attended by Columbia University Professor and Nobel Laureate Joseph Stiglitz. He anticipated that 2016 would be even worse than 2015 for the world economy, noting that the deceleration of the Chinese economy had particularly serious implications.

The basis of the economic slump, according to his analysis, was “insufficient overall demand.” As this demand would not rise were the consumption tax rate raised, he said “it was not the time” for an increase, and advocated a postponement. Coming from a scholar with a worldwide reputation, the remark is thought to be having a major influence.

However, when considering the possible sway of Stiglitz’s analysis of the world economic situation, it should be remembered that Abe cited “a major contraction of the world economy” as a necessary condition for postponing the tax increase.

Since the start of the year, global financial markets have been chaotic as a result of China’s economic deceleration, causing consumer fervor to diminish. Also during this time, the consensus among members of the government and of both the majority party and the opposition has been that, “if the tax rate increase further chills individual consumption, Japan’s economic recovery will be derailed.” Abe also recognizes that consumption is weak, but he seems to be basing his decisions on how he expects the world economy to affect Japan’s economy in the future.

With five of the aforementioned meetings to be held prior to the summit, markets have said that, “the meetings are nothing more than a venue for Abe to serve up the announcement that the tax rate hike will be postponed.”

However, many in government still believe that the tax rate should be raised as planned, since—in Ishihara’s words—this is “the key to world economic recovery.”

Keizaikai magazine
The Cabinet now appears to favor postponing the increase, particularly considering the upcoming double election in summer.