Japan's Shinzo Abe rolls the dice on his political legacy with tax hike

Mr Shinzo Abe has plowed ahead with the tax increase despite global economic jitters, trade tensions and an upper house election in July. PHOTO: REUTERS

TOKYO (BLOOMBERG) - Mr Shinzo Abe will almost certainly become Japan's longest-serving prime minister next month. Whether he'll be remembered as a success could well hinge on how the country's economy weathers what happens on Tuesday (Oct 1).

Legislation raising Japan's sales tax to 10 per cent from 8 per cent took effect Tuesday, a long-planned step intended to help the government rein in the world's largest public debt load. But it's a risky one - past tax hikes have tanked the economy and derailed political careers.

"This tax hike will be a major part of Abe's legacy," said Mr Tomo Kinoshita, global market strategist at Invesco Asset Management Ltd. "Abe is making a very important step forward for Japan's dire fiscal conditions and this couldn't be done without him standing on firm political ground."

Mr Abe has plowed ahead with the tax increase despite global economic jitters, trade tensions and an upper house election in July.

If he pulls it off without major damage to the economy or his public support, the three-straight-term Liberal Democratic Party (LDP) leader will gain bragging rights that he cracked the formula needed to pass measures to fix Japan's finances.

Seven years ago, Mr Abe assumed leadership of a country struggling through stagnant growth, a rapidly aging population and a mountain of debt spent battling deflation in the 1990s.

His signature "Abenomics" programme coincided with a global upswing that's helped the country break out of the malaise, fueling corporate profits and stock market growth.

Mr Abe has twice delayed the sales tax increase for fear that the economy might not withstand the blow, most recently ahead of an election in 2016. The last hike in 2014 dragged down consumption and prices, shrank the economy by more than 7 per cent and forced the Bank of Japan to expand its stimulus.

The current measure is estimated to bring in 5 trillion yen (S$63.9 billion) annually, of which 1.9 trillion yen will go to paying down debt.

The plan survived its first big test in July when the LDP-led government came out as the big winner in the upper house election.

But victory has come at a cost. The government pledged to put part of the proceeds of the tax toward popular programmes like subsidising education and childcare fees, helping soften the blow and weaken political opposition.

The tax increase is now expected to reduce economic output by 2.7 per cent this quarter, according to economists surveyed by Bloomberg, or less than half the impact of the previous hike.

A poll published by the Nikkei newspaper on Sept 13 found that 52 per cent of respondents approved of the hike, while 42 per cent disapproved.

"If this tax increase is overcome safely, it will be a barometer that shows the stability of the current administration," said Mr Masahiko Shibayama, a leading member of the ruling party's Policy Research Council. Success could open the door to other Mr Abe policy priorities, such as revising the country's pacifist constitution.

RECORD SETTER

On Tuesday morning, clerks were busy lining store shelves with new price tags and commuter stations unveiled maps showing revised train fares.

Mr Akio Mimura, head of the Japan Chamber of Commerce and Industry, told a press conference Monday that while there was no question the tax hike would damage the economy, it would also bring a sense of security to the Japanese people, amid a pension funding shortage, public broadcaster NHK reported.

LDP members are confident that the government will be able to absorb the hit as Mr Abe prepares to overtake Premier Taro Katsura, who was in office a century ago, as the country's longest-serving elected leader on Nov 20. His current term as ruling party chief expires in September 2021, although a fiscal win could give him support to push through rule changes for an unprecedented fourth term.

Mr Abe could still see his plans torn asunder by a slowing global economy that has been dented by the trade war between the US and China - his country's biggest trade partners.

In New York last week, Mr Abe said he won assurances from President Donald Trump that he wouldn't implement tariffs on Japan's US$50 billion (S$69 billion) worth of cars and parts it sends to the US, but their joint statement didn't definitively end the tariff threat.

In another possible warning sign, Japan's factory activity shrank at the fastest pace in seven months last month. Slowing demand overseas has made the economy more dependent on consumer spending, which is likely to take a hit from the sales tax hike.

"Japan can't change what the global environment looks like when it starts to raise taxes," said Mr Shaun Roache, S&P Global Ratings Asia-Pacific chief economist. "Frankly the global environment has not gotten much better, but they still have decided to go ahead with it."

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