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Japan PM Abe announces tax-hike delay

Prime Minister Shinzo Abe announces delay of consumption tax hike at the Prime Minister's Office in Tokyo on June 1.

TOKYO -- Japan's Prime Minister Shinzo Abe announced Wednesday a two-and-a-half-year-delay in his long-planned consumption tax hike, until October 2019. The Japanese economy remains fragile four years into his signature Abenomics policy of fiscal stimulus and structural reform. Abe said a tax hike at this point would "create a risk of the country falling back into deflation."

"The world economy has changed at an unexpected pace in the last year," Abe said at a news conference, explaining his decision. "We are not facing a financial crisis like the Lehman crisis. But we need to learn from that experience, to implement measures to avoid another crisis. A tax hike would put domestic demand at risk, and therefore I have decided to delay the tax hike."

This is the second time Abe has put off raising Japan's consumption tax to 10% from 8%. Originally scheduled for last October, the increase was pushed back in November 2014 by 18 months to April 2017. Abe made that decision after gross domestic product shrank for two straight quarters. At the time Abe stressed there would "not be another delay," saying his policies in the meantime would strengthen the economy enough to withstand another increase. Since then, he has repeatedly said that only an economic shock of the magnitude of the Lehman Brothers collapse in 2008 or a major earthquake would prompt another postponement.

"I acknowledge that I am breaking my promise," Abe said. "I will let the people of Japan pass judgement in the upper house elections." He announced that the vote will be held on July 10 and said that if the ruling coalition takes a majority of the contested seats, he will take it as a sign of public support for the delay.

Abe also ruled out speculation that there would be a vote for both the upper and lower houses of the Diet. "It did cross my mind at one point," Abe said, but he argued that one national election was already a burden on those affected by the Kyushu earthquake. "At this point, I'm not thinking about double elections one bit," he said.

Saving Abenomics

The decision to delay the tax hike, although a climb-down from his earlier pledge, is aimed as much at saving Abenomics as it is at propping up the economy.

Nearly four years after its inception, Abe's program has hit a stumbling block, with economic growth stuck in low gear and prices falling back into negative territory. The Nikkei Stock Average has fallen 16%, while the yen has risen 10% against the dollar compared with a year ago. The impact of the April earthquake on Japan's southern island of Kyushu has deepened concern about the outlook.

Abe's relatively high approval rating owes largely to support for his economic policies. Political observers say he cannot contest the upper house election in July without offering voters a delay in the unpopular tax increase.

Help from his friends

Abe laid the groundwork for the postponement at the Group of Seven summit he hosted last week. Handing out "reference data" to his G-7 counterparts, he made the case that there could be another crisis as serious as the fall of Lehman if the major economies do not take action. Some leaders rejected Abe's diagnosis, but he managed to get enough out of the summit to sell the delay as a global necessity, thereby blunting charges from the opposition that Abenomics is failing.

"The ratio of job openings to job seekers is at its highest in 24 years. We have managed to create jobs and raise income levels," Abe said, stressing that the domestic economy was in decent shape. "But there are risks to the world economy. We agreed at the G-7 summit last week that we had to prepare for risks and take appropriate measures," he said.

"Some say the delay [in the tax hike] to October 2019 was because the government is hoping for an economic lift from the Tokyo Olympics in 2020, but it probably had more to do with the regional elections and another upper house election in 2019," said Hidenori Suezawa of SMBC Nikko Securities. The regional elections are expected to take place in April and the upper house election in July that year. The thinking is that Abe wanted to mitigate the impact of the tax hike on both contests by pushing it back until they are over.

Abe also said he will stick to the government's pledge of bringing the country's primary budget -- i.e., before interest payments on Japan's public debt -- into surplus by the fiscal year starting April 2020. Masahiro Nishikawa of Nomura Securities calls that impossible. "In order to do that, the government would need to raise the consumption tax by a further 5% in April 2020," he said. "We should recognize the possibility that this target will be pushed back as well."

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