Sales tax hike could put Abe's political legacy at risk

If it works, however, it will be evidence that he has right formula to fix country's finances

Banners announcing the rise of the national sales tax to 10 per cent in a Tokyo shop. The increase took effect yesterday, raising concerns that the Japanese economy might not withstand the blow. PHOTO: REUTERS
Banners announcing the rise of the national sales tax to 10 per cent in a Tokyo shop. The increase took effect yesterday, raising concerns that the Japanese economy might not withstand the blow. PHOTO: REUTERS

TOKYO • Mr Shinzo Abe will almost certainly become Japan's longest-serving prime minister next month. Whether he will be remembered as a success could well hinge on how the country's economy weathers what happened yesterday.

Legislation raising Japan's sales tax to 10 per cent from 8 per cent took effect yesterday, a long-planned step intended to help the government rein in the world's largest public debt load.

But it is 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 Invesco Asset Management global market strategist Tomo Kinoshita. "Abe is making a very important step forward for Japan's dire fiscal conditions, and this couldn't be done without him on firm political ground."

Mr Abe has ploughed ahead with the tax increase despite global economic jitters, trade tensions and an Upper House election in July.

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

Seven years ago, Mr Abe took control of a country struggling through stagnant growth, a rapidly ageing population and a mountain of debt spent battling deflation in the 1990s. His signature "Abenomics" programme coincided with a global upswing that helped Japan break out of the malaise, fuelling corporate profits and market growth.

Mr Abe has twice delayed the sales tax hike 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 over 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$64 billion) annually, of which 1.9 trillion yen will go to paying down debt.

INDICATOR OF STABILITY

If this tax increase is overcome safely, it will be a barometer that shows the stability of the current administration.

MR MASAHIKO SHIBAYAMA, a leading member of the policy research council of Japan's ruling party.

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 has pledged to channel part of the proceeds of the tax increase towards popular programmes such as subsidising education and childcare fees, helping to soften the blow and weaken political opposition.

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 policy priorities of Mr Abe's, such as revising the country's pacifist Constitution.

Yesterday morning, clerks lined 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, said at a press conference on 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.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on October 02, 2019, with the headline 'Sales tax hike could put Abe's political legacy at risk'. Print Edition | Subscribe