Japan may put off sales tax hike again

But Abe and finance ministry stick to April 2017 timing despite weaker spending

TOKYO • Japan's government has begun informally discussing a second delay to a hike in sales tax, as Prime Minister Shinzo Abe prepares for elections with household spending lower than when he came to office and still falling.

With consumers in a funk and retailers struggling to raise prices, Mr Abe's efforts to lift the world's third-biggest economy clear of decades of deflation and stagnation are under threat.

For now, Mr Abe and the Finance Ministry insist the tax will rise in 13 months to 10 per cent from 8 per cent, backed by many economists worried about Japan's enormous national debt, especially as moves are afoot to raise government spending ahead of summer elections for the Upper House of Parliament.

But some bureaucrats and ruling party politicians are quietly starting to game-plan a second delay to the unpopular measure.

"Considering the state of the Japanese economy, a delay is favourable," Mr Abe's economic adviser Etsuro Honda told Reuters. Mr Honda was among those who persuaded the Premier to put off the tax hike until April 2017.

Tax discussions remain preliminary, officials say, but the stirrings represent the bureaucracy's response to the changing mood that officials sense coming from Mr Abe's headquarters.

Moreover, latest figures showed that the economy shrank an annualised 1.1 per cent in the last quarter of last year. It is less than a preliminary estimate of a 1.4 per cent contraction, but private consumption remained weak.

Household spending fell 3.1 per cent in January from a year earlier, deeper than expected and the fifth decline in a row.

Consumer spending, which accounts for 60 per cent of gross domestic product, fell to its lowest since 2011 in the fourth quarter.

While many analysts expect growth to have rebounded modestly in the current quarter, the bleak outlook for global demand has led some to predict another contraction that will push Japan back into technical recession - defined as two straight quarters of shrinking growth.

The weak economic backdrop will keep the Bank of Japan under pressure to further expand monetary stimulus, although central bank policymakers meeting for a rate review next week are wary of acting so soon after adopting negative interest rates late in January.

Mr Abe raised the tax in 2014 to 8 per cent from 5 per cent, tipping Japan into recession. He delayed the second stage of the increase, initially scheduled to take effect last October, by 11/2 years.

"The sales tax hike dampened private consumption before wages and prices could ignite" and break Japan free from low growth and deflation, said Mr Takeshi Minami, chief economist at Norinchukin Research Institute.

Mr Abe has long said he would delay the hike again only if Japan were to suffer a shock on the magnitude of the 2008 collapse of US investment bank Lehman Brothers, which ushered in the global financial crisis. More recently though, he said a global economic contraction could also force a rethink and that it would be meaningless to press ahead if it crimped tax revenue by choking the economy.

The Japanese leader is already laying the groundwork for new government spending to offset weakness in household consumption. He is launching an advisory panel to consider an extra budget to fund further stimulus, even before next year's budget has cleared Parliament.

Evidence from ongoing annual wage negotiations indicates this year's pay increases will not be enough to offset the tax-hike pain if it plays out like last time, said several government officials familiar with the discussions.

REUTERS

A version of this article appeared in the print edition of The Straits Times on March 09, 2016, with the headline 'Japan may put off sales tax hike again'. Print Edition | Subscribe