TOKYO -- Japanese Prime Minister Shinzo Abe's official announcement on Monday of a snap lower-house election in October came as no surprise to investors in Tokyo. But economists and business leaders expressed concern that the government will blow a hole in the budget with higher spending.
Following Abe's announcement on Monday evening, Yoshimitsu Kobayashi, chairman of the Japan Association of Corporate Executives, or Keizai Doyukai, called the prime minister's decision to push back his initial target for achieving a primary budget surplus by fiscal 2020 "extremely regrettable."
The government "needs to clarify if and when it will set a new consumption tax rate above 10%," Kobayashi added.
Abe's move to dissolve the lower house came after he told cabinet ministers to draw up a 2 trillion ($18 billion) stimulus package for the end of the year, as he seeks to win voter support with pledges to provide free preschool and more day care slots for children with working mothers.
The government has set 2018 to 2020 as the time frame for "a productivity revolution," that Abe says will strengthen Japan's economic foundations.
In a report on Tuesday, economists at SMBC Nikko Securities said measures to shore up the books are now a lower priority for Abe's government.
"Abe claims to be sticking to the target for regaining a primary-balance surplus, but he has not given any specific measures," said Yoshimasa Maruyama, chief market economist, and Koya Miyamae, senior economist at SMBC Nikko Securities.
Raising the consumption tax to 10% from 8% would bring in more than 5 trillion yen of extra revenue, according to estimates. The government had originally earmarked 4 trillion yen to pay off government debt, and another 1 trillion yen for social services. The new plan sees the amount split evenly between the two.
Reducing the money allocated to pay down the debt will put its 2020 budget surplus target out of reach. The government will not set a new target date until it has come up with a revised fiscal consolidation plan.
In a report published Monday, UBS Wealth Management's chief investment office said the market has reacted positively to news of the snap election, but, it said, "We do not expect any effective economic policies that will boost Japan's growth or productivity."
The proposed consumption tax hike, which is expected to take effect in October 2019, "may hurt equities because the market was expecting the VAT hike to be postponed. Even though most of the tax revenue may be reallocated to new spending on education and child care, we think the net impact on the economy will be still negative," the economists said.
The election campaign gets underway on Oct. 10, with polling day set for Oct. 22. Abe needs a combined 233 seats in the lower house for his ruling Liberal Democratic Party and its coalition partner Komeito to maintain their majority. During the news conference, Abe has said he would resign if he fails to achieve that result.
In an opinion poll conducted from Friday through Sunday by the Nikkei, 44% of respondents said they planned to vote for the LDP, followed by a combined 8% for two main opposition parties.
On Tuesday, the Nikkei Stock Average opened at 20,349.26, down 0.24%. Futures were flat in morning trade at 150.85, up 0.02 point at one point during the session.