May 14, 2016 2:00 am JST
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Japan's Abe to put off sales tax hike again

Shinzo Abe

TOKYO -- Japanese Prime Minister Shinzo Abe has decided to postpone a consumption tax increase set for next April, judging it to threaten efforts to pull the world's third-largest economy out of deflation.

Abe is expected to announce the delay after further consideration, including talks with fellow Group of Seven leaders at a summit in Japan later in the month.

The economic impact of April's earthquakes in southern Japan has become clear, adding to uncertainty over domestic and global growth.

The prime minister informed senior government and ruling coalition officials Friday of his intention to postpone the tax hike a second time. The 8% rate was originally scheduled to go up to 10% last October, following the 3-percentage-point rise of April 2014.

How long Abe wants to delay the increase this time is unclear. Some officials say that if Japan waited until April 2019, it could count on a more buoyant economy thanks to the Summer Olympics in Tokyo the following year.

Junior coalition member Komeito had wanted to go ahead with the April 2017 hike as scheduled to fulfill a campaign promise of introducing a reduced tax rate on food and other necessities.

"If that's the prime minister's decision, there's nothing we can do," a senior Komeito official said.

Abe will hold a news conference June 1 following the close of the current legislative session. Government and ruling coalition officials see this as a possible opportunity to announce his decision.

Postponing the hike does not require a referendum, but voters would have an indirect opportunity to weigh in on the move in an upper house election already set for July. Abe does not intend to call a snap lower house election for the same day.

Legislation needed to delay the tax increase would follow during a special session sometime after the election.

Abe's government intends to maintain its goal of achieving a primary surplus -- an excess of revenue over spending other than debt servicing -- in the fiscal year starting April 2020. An interim goal of reducing the primary deficit to 1% of gross domestic product by fiscal 2018 would be revised.

It's the economy

Abe conceded earlier in the month that raising the consumption tax to 8% had a bigger-than-expected impact on consumer spending. He has argued repeatedly in parliament that Japan would be worse off after an increase that failed to generate higher revenue. Abe cited the threat to his campaign against deflation as grounds for postponing the rise to 10% the first time.

Japan's economy shrank an inflation-adjusted 0.3% in the fourth quarter of 2015 compared with the previous three months, revised figures show. Many forecasters expect the initial GDP reading for the first quarter of 2016, due out next Wednesday, to prove similarly depressed. Consumer prices are sinking. And the impact of the Kyushu temblors on consumer and business activity will linger.

A rising yen is threatening corporate Japan's earnings and the stock market's performance. As for the global economy, growth prospects in China and other emerging markets are dimming amid unstable crude oil prices. Nobel laureate Joseph Stiglitz and other prominent economists have counseled Abe not to impose a higher tax burden on consumers under such conditions.

Abe intends to call on G-7 leaders to take coordinated action against global economic anxiety, including fiscal stimulus to whet domestic demand. Going ahead with a consumption tax hike even as he urges others to pursue accommodative fiscal policies could be seen as recalcitrant.

Never say never

The prime minister declared back in November 2014, when he first postponed the tax increase, that he would not do so again. As time went on, he insisted that it would take a financial shock like the Lehman Brothers collapse or a major earthquake to bring about another delay. Faced with the task of explaining his decision now, Abe is likely to point to factors including a worsening domestic economy, the need for policy coordination, and the Kyushu disaster.

(Nikkei)

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