That risks snuffing out already sputtering growth
pledges Shinzo Abe made in 2012, as he started his second stint as Japan’s prime minister, was to double the sales-tax rate. At 5% it was low by rich-country standards, and Japan’s public finances, battered by years of deficits, needed shoring up. But having gone part-way, to 8%, in 2014, he has twice put off finishing the job for fear of choking off a tentative economic recovery.
Everyone agrees that a higher sales tax is needed, but they differ on the wisdom of a speedy move. The previous hike provoked a sharp downturn. Now fresh signs of economic weakness are leading to fears of a repetition.Just a few months ago the government was congratulating itself on having overseen Japan’s longest economic expansion since the second world war .
The budget for 2019 includes ¥2trn of offsetting measures. Food, non-alcoholic drinks and newspapers will continue to be taxed at 8%. Poor households will receive shopping vouchers. Customers of smaller businesses will get rebates worth 5% of their purchase, or 2% at restaurants and convenience stores, provided they pay without cash.
But plenty of observers are urging continued caution. Subdued price pressures mean that inflation remains far below the Bank of Japan’s target of 2%. If the economy is weak enough to require a negative interest rate , it is surely too weak to withstand a tighter fiscal stance, they argue. And although gross public debt stands at around 2.5 times annual“Raising the consumption tax is putting the cart before the horse,” says Ms Beamish.
Even some supporters think that if Mr Abe has to pause yet again, he will have only himself to blame. He has undoubtedly had a hand in Japan’s tentative economic recovery, mainly through monetary loosening, although the comfortable global environment helped. But he has also delayed reforms that would have put the economy on a firmer footing.
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