A potential snap election next month in Japan clouds the outlook for Japanese Prime Minister Shinzo Abe’s administration’s economic program as the nation struggles to shake off the impact of this year’s sales-tax increase.
Abe is likely to call a general election on Dec. 14, according to two people with knowledge of the ruling Liberal Democratic Party’s (LDP) strategy.
His government favors delaying the next bump in the sales levy until April 2017, said LDP lawmakers who asked not to be named.
With steps such as opening Japan to casinos, scaling back labor regulations and reforming social security still to be taken, a parliamentary election next month risks putting off structural changes deeper into next year.
Any reduced majority for the ruling coalition could also subject Abe’s reflation program to increased criticism.
“It would be asking the voters to give an endorsement of Abenomics,” Hong Kong-based HSBC Holdings PLC economist Izumi Devalier said, adding that an election would also help Abe silence “fiscal hawks” in the party who want the tax hike.
The Nikkei 225 Stock Average yesterday gained 0.4 percent after jumping 2.1 percent on Tuesday amid speculation of a delay in the tax and an election next month.
The world’s third-biggest economy contracted 7.1 percent in the second quarter, the most in more than five years, after the government increased the tax by 3 percentage points to 8 percent.
Abe adviser Etsuro Honda yesterday said that the tax hike is out of the question if the economy grows less than 3.8 percent in the third quarter.
GDP data is scheduled to be released on Monday next week, with the median of projections by economists for a rise of 2.8 percent.
No decision has been made to postpone the tax rise, Japanese Minister of Finance Taro Aso said yesterday in parliament, adding that it would be very hard to fund Japan’s social welfare without increasing the tax to 10 percent, as planned.
Bank of Japan Governor Haruhiko Kuroda said that he hoped the government would work to put Japan’s finances on a sustainable footing, and that it was vital to secure confidence in Japan’s fiscal management.
The yen was 0.4 percent stronger at 115.36 per US dollar after it touched a seven-year low on Tuesday.
Government bond prices fell, with yields on 10-year government debt rising to 0.52 percent at 3:50pm in Tokyo, according to data compiled by Bloomberg.
Liberal Democratic Party Legislator Hiroyoshi Sasagawa said in an interview that voters should be asked whether the sales tax should be increased.
The risk for Abe, 60, is that without other sources of revenue, Japan’s debt burden — the world’s biggest — is likely to continue expanding.
“I really want to see the progress of Abenomics before they call an election,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co in Tokyo and a former central bank official. “The government should go ahead with the sales tax increase.”
Adviser to the central bank Masahiro Kawai said the government should raise the sales tax as planned.
He joined the head of Japan’s biggest business lobby in calling on Abe to avoid an election and instead focus on pursuing his growth strategy program.
“By postponing the tax hike, Abe would lose fiscal trust, raise risk premiums and make the BOJ’s job much harder,” Kawai said in an interview.
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