PM Abe delays sales tax hike by 21/2 years

Move casts pall over plans to cut huge public debt and fund social welfare costs

TOKYO • Japanese Prime Minister Shinzo Abe yesterday announced his widely expected decision to delay a scheduled sales tax increase by 21/2 years, putting his plans for fiscal reforms on the back burner due to growing signs of weakness in the economy.

While the decision may help Mr Abe win votes at an Upper House election on July 10, it could also fan doubts about his plans to curb Japan's huge public debt and fund ballooning social welfare costs of a fast-ageing population.

Mindful of opposition criticism that the delay is a sign that his "Abenomics" stimulus policies have failed to spur growth, the prime minister justified the decision, saying it was needed to forestall risks posed by external factors, notably slowing Chinese growth.

"Abenomics has been steadily producing results, but the global economic environment has changed unexpectedly quickly in the past year. The biggest risk is the slowdown in emerging economies," Mr Abe said.

"Faced with global risks, we must fully reignite the engine of Abenomics and speed up efforts to escape deflation."

It is the second time Mr Abe has delayed a move to increase the sales tax to 10 per cent from 8 per cent, after a rise from 5 per cent in April 2014 tipped the economy back into recession.

Mr Abe, whose premiership will end when his term as president of the Liberal Democratic Party finishes in September 2018, had repeatedly said he would raise the tax as planned unless the economy faced a shock from a financial crisis or natural disaster.

"From an economic standpoint, the market is likely to view the delay as a positive surprise for domestic demand," said research analyst Lee Jin Yang at Aberdeen Asset Management in Singapore.

Mr Abe, whose premiership will end when his term as president of the Liberal Democratic Party finishes in September 2018, had repeatedly said he would raise the tax as planned unless the economy faced a shock from a financial crisis or natural disaster.

But he laid the groundwork for a delay at last week's Group of Seven summit, insisting his G-7 partners shared a "strong sense of crisis" about the global economy, and he drew parallels to the 2008 world financial crisis that followed the bankruptcy of Lehman Brothers.

Mr Abe said that while the global economy was not on the verge of another financial crisis, Japan must spearhead efforts to boost global demand by loosening fiscal policy. "We'll deploy a comprehensive, bold economic package this autumn," he said, without indicating the scale of spending envisaged.

Although many economists found Mr Abe's comparisons to the Lehman Brothers failure to be far- fetched, there is consensus that Japan's economic data has been disappointingly weak.

Manufacturing activity in May contracted by the most in more than three years. Corporate profits fell at the fastest pace in more than four years in the January-March period. Slow wage growth has also weighed on consumer spending.

Mr Abe said he has not abandoned a pledge to bring the primary budget balance into surplus by the fiscal year starting in April 2020, and rein in public debt which is already more than double Japan's annual economic output.

But that target had already looked elusive, even based on the government's rosy forecast of real economic growth of 2 per cent on average in the coming years.

Prime Minister Abe also ruled out calling a snap general election for the powerful Lower House of Parliament as he did in 2014 after announcing the first tax hike delay.

REUTERS

A version of this article appeared in the print edition of The Straits Times on June 02, 2016, with the headline 'PM Abe delays sales tax hike by 21/2 years'. Print Edition | Subscribe