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

The Games “will be a catalyst that will clear away 15 years of deflation and shrinking,” he said.

Supporters of a higher sales tax, including Japan’s powerful Finance Ministry, say the move is necessary to rein in public debt. By all measures it is gargantuan, in large part because of the costs of caring for Japan’s increasing elderly population. This year, national debt topped 1 quadrillion yen for the first time — more than twice the size of Japan’s economy, and larger than the economies of Germany, France and Britain combined.

The size of Japan’s debt worries many economists and investors, who say any loss of confidence by markets in Japan’s fiscal

sustainability — brought about, for example, by postponing plans to raise taxes — could cause interest rates to rise, which might cripple Japan’s ability to service its debt.

Even supporters of a tax increase, however, acknowledge that a 3 percent rise in the consumption tax will not go very far in addressing Japan’s debt. It is expected to generate about 8 trillion yen in additional tax revenue a year. However, it was still important to “at least give the appearance” that the country was doing something about its mounting obligations, said Hajime Takata, chief economist of Mizuho Research Institute, in a statement after he took part in the government’s forum this month.

“The reason why we don’t see bonds issued by a government more than ¥1 quadrillion in debt go into nosedive is because of an unspoken trust the Japanese people hold in Japanese bonds and its government,” he said.

That trust, Takata warned, could be broken if Japan reneged on plans to start putting its finances in order by taking the tough step of raising the consumption tax.

The tax — which would be levied equally on all goods and services — is considered easy to collect, causes less distortion to the overall economy and is a more stable source of revenue than an income tax even in aging Japan, because everyone must consume. And at 5 percent, Japan’s sales tax is among the lowest in the world.

A second stage, laid out by the previous government of Yoshihiko Noda, would raise the rate to 10 percent in October 2015.

Public opinion has been divided. A survey of 1,658 voters published by the Asahi newspaper last month showed 43 percent of respondents in favor of initially raising the sales tax to 8 percent as planned, and 49 percent opposed.

Koichi Hamada, professor emeritus of economics at Yale University and a confidant to Abe, has called for a more gradual tax increase that would raise the consumption tax rate by 1 percentage point a year to limit adverse effects on the bond market and economic growth.

Such economists are less concerned about any imminent risks posed by Japan’s fiscal woes to the bond market. For more than a decade, Japanese bond prices have withstood numerous downgrades by credit ratings agencies, as well as the debt crisis in Europe. In fact, global financial turmoil has tended to lower yields on Japanese government bonds, as Japan became a safe haven.

The bigger risk as these economists see it is a slowing economy that would hurt tax revenue, and in that way, imperil Japan’s finances. The naysayers have historical precedent to back up their fears.

The last time Japan raised its consumption tax, to 5 percent from 3 percent in April 1997, its economy soon plunged into recession. Retail sales rose significantly in the months before the tax increase, as consumers loaded their pantries and made big-ticket purchases, but plummeted in April and never quite recovered. Consumer prices, adjusted for the tax increase, plunged afterward and have hardly grown since.

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