Thu, Sep 19, 2013 - Page 9 News List

Japan’s economic recovery might be put at risk by tax increases

Japan’s prime minister is popular, but he may have to trade in his popularity for an unpopular policy — and that policy might not be the right one anyway

By Hiroko Tabuchi  /  NY Times News Service, TOKYO

Japan is on a roll. Its economy is growing at a robust 3.8 percent, the stock market is up by 40 percent this year, and the country is on the cusp of overcoming 15 years of deflation. Adding to the positive trend, Tokyo just won its bid to host the 2020 Summer Olympics, raising hopes of an investment and construction boom.

What could possibly go wrong?

A plan to raise taxes at the worst conceivable moment, economists say.

“It’s nonsense. Japan is only midway to recovery and hasn’t fully escaped deflation,” said Goushi Kataoka, chief economist at Mitsubishi UFJ Research & Consulting, which is affiliated with Japan’s largest bank, Mitsubishi UFJ Financial Group.

“Just as we are beginning to see the light, we’re threatening to snuff it out,” Kataoka added. “We’re trying to roast the pig before it’s fat enough to eat.”

After weeks of debate, Japanese Prime Minister Shinzo Abe appears ready to go ahead with a plan to raise Japan’s national sales tax rate in April next year to 8 percent from 5 percent — part of his bid to rein in the country’s public debt, which has surged to more than twice the size of its economy.

However, opponents say raising taxes on spending is premature, especially because it could dampen consumer spending, considered the weakest link in Japan’s nascent recovery. If spending slumps, Japan could slide back into the deflationary morass that has dogged it for 15 years.

Such a misstep threatens to bring down the curtain prematurely on Japan’s economic revival this year, led by Abe’s bold set of monetary and economic policies, called “Abenomics,” which has brought about one of the most unexpected turnarounds in recent years. Japan is now one of the most promising engines of growth this year among the world’s developed economies.

Still, proponents of raising the tax are pushing for action now because they fear a return to the dysfunction that has marred Japanese politics for several years through a succession of prime ministers, said Noah Smith, an assistant professor of finance at Stony Brook University in New York.

Abe, with solid support, could be the last prime minister in a while to be able to push through unpopular changes, he said.

“The optimal policy is to wait to raise the consumption tax, maybe a year. But given Japan’s political dysfunction, many people are afraid that if you wait too long, that will never get done,” Smith said. “The idea is that if we see a chance to make unpopular structural reforms, we need to take it now, even though it’s not the optimal time.”

To soften the blow, the Japanese government is considering putting together a stimulus package of as much as ¥5 trillion (US$50 billion), a sum that would return the equivalent of 2 percentage points of the tax rate increase to consumers and companies, local news reports have said. Abe has said he will not a make an official decision until early next month. Japan’s business lobby has also called on the government to slash the country’s relatively high corporate tax rates to make up for an anticipated drop in consumption.

Speaking at a government panel on economic and fiscal policy on Friday last week, Abe suggested Japan’s recovery was robust and its economy was escaping deflation. He also said that government and private-sector spending before the 2020 Games would further bolster economic recovery.

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