Abe to put off tax hike to mute shocks to faltering economy

TOKYO – Prime Minister Shinzo Abe is due Wednesday to announce he is postponing a sales tax hike to help nurture along Japan’s economic recovery.

After repeatedly insisting he would go ahead next year with the increase in the national sales tax to 10 per cent from the current 8 per cent, Abe decided the risk of yet another economic downturn was just too high.

Japan has the world’s third-largest economy. Growth has stalled, however, as the population has begun shrinking and aging and manufacturers moved overseas to tap into faster growing markets.

Abe has championed a barrage of monetary easing meant to vanquish deflation, which tends to discourage corporate investment and consumer spending. So far the strategy has made only limited progress.

The tax increase due in April 2017 is likely to be delayed until October 2019, after Abe leaves office.

While the decision will help the Liberal Democrats in an upcoming election for the upper house of parliament, it has raised questions over whether the “Abenomics” economic strategy has failed.

Abe easily weathered a no-confidence motion introduced by opposition leaders Tuesday, thanks to the Liberal Democratic Party’s strong majority in parliament.

But opposition party leaders lashed out, accusing Abe of using concern over slowdowns in China and other emerging economies as a smoke screen for the failings of his own policies.

“Prime Minister Abe should immediately step down,” said Katsuya Okada, head of the Democratic Party, one of four opposition parties that submitted the no-confidence motion. “He mishandled economic policy, and his Abenomics has failed.”

With Japan’s public debt at nearly 240 per cent of its GDP, putting the nation’s accounts in order is an urgent priority. Economists and finance ministry officials say the tax needs to rise to 20 per cent or more as costs of caring for the country’s aging population soar.

But those favouring a delay argue the recovery is too weak to endure a fresh hit to consumer spending from a tax hike that could actually cause government revenues actually contract.

The last time Japan raised its sales tax, to 8 per cent from 5 per cent in April 2014, the economy sank into recession. Growth has been uneven since then, and Abe initially opted to postpone the increase to 10 per cent, originally set for October 2015, to April 2017.

By again postponing the tax hike again, Japan risks having its credit downgraded. However, most of its debt is owned by domestic investors unlikely to dump their holdings of Japanese assets.

The delay is raising questions over how to finance government spending commitments due to be paid for by tax increase, including payments of stipends to low-income pensioners, subsidies for elder care and scholarships, and pay increases for nursing and childcare workers.

Abe reportedly rejected the idea of dissolving the lower house of Parliament and holding a snap election in July, when Japan is due to hold a vote for the less powerful upper house.