Mon, Jul 22, 2013 - Page 15 News List

Sales-tax debate looming for Abe after election

Bloomberg

Koichi Hamada, an adviser to Japanese Prime Minister Shinzo Abe, said that he was cautious about increasing Japan’s sales tax soon, signaling Abe will face debate over the planned move after a forecast election victory yesterday.

“It is possible to postpone,” Hamada said at a gathering of business leaders in Karuizawa, Nagano, on Friday, referring to a plan to increase the levy in April next year.

“I think it is necessary to let people know about this,” he said, adding that “it is the prime minister’s decision.”

Abe needs to shore up the finances of a nation bearing a debt load more than twice the size of GDP without choking off the recovery by damping consumption.

Japanese Minister of Justice Sadakazu Tanigaki, a former leader of Abe’s Liberal Democratic Party (LDP), said on Tuesday that talk of delaying the sales-tax increase was dangerous because “Abenomics” was built on the assumption that the levy would rise.

“After the election, Abe may find that a sales-tax increase isn’t the consensus of the entire LDP and he may be forced to become careful in pushing through the policy,” said Daiichi Life Research Institute chief economist Hideo Kumano, a former Bank of Japan official.

“Debates to examine the need for a higher sales tax may surface following an election,” he said.

While Japan needs to raise the consumption tax in the medium or long term, the move would be a shock for the economy, said Hamada, who advised on monetary policy as Abe developed the package of policies called Abenomics.

“The need for fiscal consolidation is shared globally and Abe has no choice but to increase the sales tax in order to improve Japan’s fiscal situation,” said Tokyo-based Royal Bank of Scotland Group PLC chief economist Junko Nishioka, a former Bank of Japan official.

Fiscal stimulus and the Bank of Japan’s unprecedented monetary easing jump-started the recovery of an economy stuck in a 15-year deflationary malaise. The 5 percent sales tax is due to increase to 8 percent in April and 10 percent in 2015. Economists forecast the economy will contract after the April increase.

Abe is set to win control of both houses of parliament, giving the LDP-led coalition the strongest grip on power since 2007.

The LDP and its coalition partner New Komeito were on track to win more than 65 of the 121 upper house seats up for grabs, according to a poll published in the Nikkei Shimbun last week.

Added to the coalition’s 59 seats in the uncontested half of the chamber, it will have a majority for the first time since 2007.

Even with an election victory, the administration will face the harder part of implementing Abenomics, London-based Capital Economics Ltd economist Julian Jessop wrote in a report. Critics of reform within the LDP, including the agricultural lobby and opponents of the Trans-Pacific Partnership free-trade agreement, may feel freer to speak out after the poll.

“It will not be plain sailing once the voting is out of the way,” Jessop said.

Reform in areas from agriculture to labor markets will be difficult politically to push through, said Organisation for Economic Co-operation and Development deputy secretary-general Rintaro Tamaki, a former top currency official at the Japanese Ministry of Finance.

“Any reform cannot be easy,” Tamaki said in an interview in Singapore on Saturday.

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