Do Japanese tax hike delays come in threes?
Nikkei Asian Review
June 1, 2016
TOKYO — Japanese Prime Minister Shinzo Abe’s decision to postpone a planned consumption tax increase for the second time raises a question: Will there be a third delay? Several political and economic factors — at home and abroad — could come into play.
The 8% tax was supposed to rise to 10% in October 2015, but the hike was put off until April 2017. Now it will not happen until October 2019.
The new delay of two and a half years, rather than an even two, makes sense politically. Tax increases are always unpopular, and raising the rate in April 2019 would hurt the ruling camp’s chances in unified local elections that spring and an upper house poll that summer. The October 2019 date should also create an economic tailwind for the summer election, thanks to a pre-hike consumption rush.
When it comes to this July’s upper house election, the Abe government appears to be in a strong position, coming off a successful Group of Seven summit in Ise-Shima. The government’s support ratings are rising, according to opinion polls by Nikkei and other media organizations.
Government-BOJ tango
The tax hike does have direct bearing on Japan’s international pledge to put its fiscal house in order. Abe justified the delay by stressing he had gained other world leaders’ “endorsement” at the G-7 summit. Global economic conditions may not be as dire as they were after the collapse of Lehman Brothers in 2008, but there are undeniable risks.
Still, the postponement will cause complications for the government. For one thing, it will have to wait for the projected revenue gains. The shortfall will have to be covered by issuing more government bonds or selling publicly owned assets.
Fortunately for Abe, net assets in Japan’s private sector exceed the government’s net liabilities. Japan, in fact, ranks No. 1 in the world by net assets.
In addition, the Bank of Japan continues to buy enormous amounts of government bonds from the market under its monetary easing policy. The balance between supply and demand for government bonds, therefore, is unlikely to suddenly tip.
Though the delay will make it difficult for Japan to deliver on its stated goal of achieving a primary balance surplus, the Abe government can shift the emphasis to the ratio of outstanding government debt to nominal gross domestic product as the key indicator of economic health.
Even if the primary balance remains in the red, the government can prevent a rise in that ratio as long as the nominal rate of economic growth is higher than long-term interest rates. For this to work, the nominal growth rate will need to be raised via economic strategies, while the BOJ will need to prevent long-term rates from rising while also buying additional government bonds.
In other words, the second delay puts the spotlight on the BOJ. And Abe’s political fortunes — as well as the prospects for finally carrying out the tax hike — could hinge on the central bank’s leadership.
BOJ Gov. Haruhiko Kuroda’s term ends in April 2018, while Abe’s run as president of the ruling Liberal Democratic Party will expire that September. If the prime minister hopes to secure an extension, it will be crucial to either get Kuroda reappointed or select another central banker who would play ball with the government.
Trump wild card
The U.S. presidential election this November is an X factor. Donald Trump, the presumptive Republican nominee, has proposed economic stimulation through tax cuts, lower interest rates and a correction of the strong dollar. He has also signaled reluctance regarding the possible reappointment of Janet Yellen as chair of the Federal Reserve Board.
If Trump wins the White House and stirs economic confusion, Japan would feel the impact. A weaker dollar, in particular, would significantly affect the Japanese economy.
In that scenario, the old saying “what happens twice will happen thrice” could hold true and the tax increase might be put off again. The risks of such a delay should be kept in mind.□
YOICHI TAKITA, Nikkei senior staff writer