Japan must delay sales-tax rise to recover, Abe aide says

Japanese Prime Minister Shinzo Abe speaks at a news conference during the G7 Ise-Shima Summit in Shima.
Japanese Prime Minister Shinzo Abe speaks at a news conference during the G7 Ise-Shima Summit in Shima.PHOTO: REUTERS

TOKYO (BLOOMBERG) - Japan needs to delay increasing its sales tax until late 2019 to sustain its economic recovery, an aide to Prime Minister Shinzo Abe said on Sunday (May 29). There is a possibility that such a move could trigger a general election.

The government will probably hold off raising the tax because it needs to give priority to economic growth, Abe aide Hakubun Shimomura said on Fuji television. Japan's lower house of parliament would need to be dissolved for a general election if the planned increase is delayed again, Finance Minister Taro Aso was cited by Kyodo News as saying on Sunday at a meeting of the ruling party's members.

Mr Abe has said he'll make a decision before an upper-house election this summer on whether to go ahead with a planned increase in the levy next April to 10 per cent, from 8 per cent at present. He had previously said the matter would be decided at an appropriate time and that it would be postponed only if there was a shock on the scale of a major earthquake or a corporate collapse like that of Lehman Brothers.

An increase in the levy in 2014 pushed Japan into a recession.

"We have no other options but to postpone the sales-tax increase," Mr Shimomura said. "If the increase means a decline in tax revenue for the government, that would threaten the achievement of the goals under Abenomics."

The prime minister told Finance Minister Taro Aso and LDP's Secretary General Sadakazu Tanigaki on Saturday to delay the sales-tax increase to October 2019, NHK reported. Mr Aso advised the prime minister to be cautious about the idea, NHK said.

"If the tax increase is delayed, a general election is needed to put the plan to the public," Mr Aso was quoted by Kyodo News as saying on Sunday. Kyodo reported later that Mr Abe doesn't plan to call snap elections on the same day as the Upper House vote.

If Mr Abe fails to go ahead with his plan of raising the tax in April, it means his economic policies have failed and he and his cabinet members should resign to take responsibility, Tetsuro Fukuyama, vice secretary general of the opposition Democratic Party of Japan, said in a programme aired by public broadcaster NHK on Sunday.

Mr Abe warned at a Group of Seven leaders meeting last week that the global economy faces significant risks of another crisis. While the Japanese leader failed in a bid to have the G-7 include his warning in a communique issued Friday, he referenced the "Lehman shock" repeatedly in a press conference and said the world economy is threatened by a prolonged slowdown in demand.

Since the previous tax increase in 2014, Japan's economy has moved back and forth between contraction and growth. Consumer spending remains weak and inflation data released on Friday show that prices are falling again. Retail sales growth stalled in April, data showed on Monday.

If delayed, it would be Abe's second postponement as the tax was initially scheduled to be raised in October of last year.

"Japan is in economic conditions that require a delay to the sales-tax increase," Yasufumi Tanahashi, acting secretary- general of the ruling Liberal Democratic Party, said on the NHK programme. It is natural for Japan to take proactive measures as risks to global economies are increasing, he said.

A slowdown in the Chinese economy and weaker equities markets are also having negative effects on Japanese consumer spending, Mr Tanahashi said.