Dan Steinbock

The View | Japan faces an urgent economic problem, but a sales tax hike is not the solution

Tokyo plans to proceed with a sales tax increase in October, despite signs of economic weakness and signals of an end to monetary easing. But, instead of penalising the middle class, it should be solving Japan’s structural problems

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OECD secretary general Ángel Gurría shows a GDP growth chart for Japan (red) and the OECD (green) with Japanese Prime Minister Shinzo Abe during a courtesy call at the prime minister’s official residence in Tokyo on April 15. The Organisation for Economic Co-operation and Development is urging Japan to triple its sales tax, to 26 per cent, to achieve a large primary surplus. Photo: AP

Dan Steinbock

Published: 2:30pm, 1 May 2019Updated: 10:08pm, 1 May 2019

Japan has vowed to go ahead with a twice-delayed sales tax hike in October, unless there is a major economic shock. But recently, the cabinet office downgraded its headline assessment of Japan’s economy for the first time in three years. Manufacturing, housing and retail indicators reflected signs of weakness, while first-quarter economic figures, expected in May, could show a contraction – especially as the impact of US President Donald Trump’s trade war spreads in Asia.

The Japanese government’s efforts to rejuvenate the economy are unlikely to bear fruit any time soon.

In December 2012, when the Liberal Democratic Party returned to leadership, Prime Minister Shinzo Abe campaigned on providing massive fiscal stimulus, aggressive monetary easing and structural reform. The devaluation of the yen, critical to Japanese exporters, was the implicit denominator of the proposed changes.

In addition to high liquidity risk, Tokyo took a risk in timing. It sought to implement a stimulus package in 2013, and fiscal consolidation – in the form of a sales tax increase – was to follow. Obviously, unease increased in 2014. When Abe went ahead with the first sales tax hike, from 5 to 8 per cent, that spring, consumers were hit hard and the economy slumped. Instead of economic expansion, Japan was looking at its third lost decade.

However, international observers have been remarkably optimistic about Japan recently. Last November, the International Monetary Fund reported that Japan “has had an extended period of strong economic growth”.

As the growth rate, supported by huge monetary injections and growing debt, increased to 1.9 per cent in the fourth quarter of 2018 and inflation reached nearly 1.5 per cent, the Abe administration began to flirt with another tax hike. “The sales tax hike to 10 per cent is needed the most to secure stable financial resources to pay for social security for all generations,” said Finance Minister Taro Aso.