Japan and Abenomics: Taxing times

Nguồn tin: nguontinviet.com

WHEN Japan’s prime minister, Shinzo Abe, declared on October 1st that he would raise the consumption tax in April, from 5% to 8%, he was merely implementing the first part of a decision that was taken by his predecessor as prime minister, Yoshihiko Noda of the Democratic Party of Japan. That move contributed to Mr Noda’s downfall. The last time the tax was actually raised, in 1997, the economy promptly lurched into recession, and the prime minister of the day (from the Liberal Democratic Party, or LDP, as is Mr Abe) was also soon gone. Yet this month Mr Abe had no choice. The political establishment had signed up to a rise, and to dodge the hard decision would have damaged his own credentials.

Japan’s gross public debt stands close to 245% of GDP. For those at home and abroad who fear the country could one day take the Greek road to bankruptcy, the ¥7.5 trillion ($76.5 billion) a year of additional revenue is a small but crucial first step. And Mr Abe is likely to take a second step, raising the tax to 10%, in 2015.

The consumption tax is Mr Abe’s first big domestic test since he came into office in a landslide electoral win last December. Raising it carries the risk of eventually being punished by voters. To escape that, Mr Abe’s three-pronged strategy to revive the economy, known as “Abenomics”, needs to work. In April the Bank of Japan embarked on a “shock and awe” mission to banish deflation with a radical monetary easing. A generous fiscal stimulus accompanied the move. Meanwhile, within weeks a complete programme of structural reforms is supposed to be unveiled.

The fear is that, as in 1997, the tax rise could halt a recovery in its tracks. Households already face a squeeze. Higher prices resulting from a weaker yen are as yet unmatched by higher wages. Yet this week Mr Abe insisted there was no alternative but to pursue economic recovery and fiscal consolidation at the same time. It was, he said, the only way “to maintain faith in the country and to pass on a sustainable social-security system to the next generation”. It is unusual to hear Mr Abe sound responsible rather than weirdly disjointed.

Economists who support the tax rise say that in 1997 a currency crisis in Asia and credit problems at Japan’s large banks were as much to blame for the slump as the higher tax. The government also blundered by cutting spending on public works. This week, by contrast, Mr Abe outlined a new stimulus package worth perhaps ¥6 trillion to offset the effect of the tax rise. Most of it will go on public works and corporate-tax cuts. It is robbing Peter to pay Paul, perhaps, but it will help avoid an abrupt fiscal contraction.

The hope is that extra stimulus packages will not be necessary for ever. The Bank of Japan’s monetary easing, a weaker yen and, perhaps, the promise of structural reforms have combined to pep up the economy. In the first quarter of the year annualised growth was 4.1%, and it was 3.8% in the second quarter. On October 1st the third Tankan quarterly survey of business sentiment since Abenomics was launched showed businesses at their most ebullient in six years.

And yet Mr Abe had sent conflicting signals about the consumption tax for much of the year. Two of his closest advisers, who helped design Abenomics, demanded a more gradual rise in the consumption tax. Mr Abe sought the counsel of dozens of experts, delaying his verdict. Before the risky step of a tax hike, says Yasuhisa Shiozaki, policy chief for the LDP, it was politically wise for him to show that he had considered his options extremely carefully.

In part, Mr Abe may have wielded the possibility of reneging on the tax rise as a way to extract more money for his stimulus package from the conservative finance ministry. This week he promised to start discussions on lowering Japan’s tax rate on profits, which is much higher than in most other rich countries. Mr Abe’s government also appeared to cast doubt on whether or not he would proceed with the second rise in the consumption tax, from 8% to 10%, which is due to take place in October 2015, not long before a general election due by 2016.

Fiscal consolidation under Mr Abe, then, is by no means assured. A battle is now taking place inside the cabinet over how to achieve both growth and lower debt, says Takatoshi Ito of the University of Tokyo, who advised Mr Abe on the tax. Taro Aso, the finance minister, is doing his best to resist Yoshihide Suga, the chief cabinet secretary, who privately lobbied for a smaller tax increase, and Akira Amari, the industry minister, who wants much lower corporate taxes.

Cutting high taxes on big firms makes sense, but risks a backlash at a time when people are being asked to pay more. For instance, Yutaka Ishida, a small-business owner in Sanya, a rundown area of north-central Tokyo, predicts that his sales will slump by a fifth when the consumption-tax rise takes effect. Yet neither will the government use the money for anything good, he says, nor will he benefit from lower corporate taxes as much as big business. Many in the LDP are also against cutting corporate taxes. Meanwhile, economists caution against more spending on infrastructure. Soon after the LDP’s win last year, its various zoku or “tribes”—for construction, railways, roads and more—all cheered: much of Mr Abe’s first fiscal stimulus worth ¥10.3 trillion, announced in January, went to their supporters. But the construction industry’s productivity continues to fall, and it is short of workers. Spending on public works will not achieve much, says Naohiko Baba, chief economist at Goldman Sachs.

Eyes on the distant prize

In the long run, the most effective way to get the economy back on track is structural reform that promotes both growth and higher tax revenues. Now is the time for the prime minister to pursue it. Mr Abe’s popularity is uncannily high. He has virtually no opposition in the Diet, and no rivals to his leadership inside the LDP. He has every chance to push through structural reforms in this autumn’s session of the Diet, starting in mid-October.

Leading proponents of reform are cautiously optimistic that the cabinet may now unpick “bedrock” regulations, such as a forced limit on rice production which keeps agriculture inefficient. A controversial loosening of labour rules on hiring and firing in a series of planned special economic zones is under discussion. Such changes will prove every bit as contentious as raising the consumption tax. But introducing them would mark a real break with past political failure.

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