We have updated our Terms of Use.
Please read our new Privacy Statement before continuing.

Keeping faith

19 November 2014 By Andy Mukherjee

Shinzo Abe’s new timetable for raising Japan’s sales tax could do with a credibility boost. Making a future increase dependent on wage growth might be a better strategy.

The Japanese prime minister announced on Nov. 18 that he would postpone the 2 percentage point tax hike scheduled for next October. To rally voters behind the idea, Abe also called for a general election.

The delay was not a surprise. The decision to add 3 percentage points to the sales tax earlier this year has cratered consumption and tipped Japan into a recession. Delaying the second increase by 18 months offers some relief to consumers without materially adding to the government’s already-massive debt load of 245 percent of GDP.

But the fact that demand is so fragile makes investors understandably sceptical about the new timetable. Abe has vowed that there will be no further delays, but has no way of knowing whether the economy will be in better shape in April 2017 than it is today. Investors could be forgiven for concluding that a levy which has only been raised twice in 17 years – and has triggered a recession both times – is unlikely to be bumped up again. If the central bank stops buying bonds, Japan could struggle to finance its borrowing.

A more convincing strategy would be to link future changes in fiscal policy to real wage growth. After all, the main aim of Abenomics is to slay deflation by boosting private demand. Both consumption and investment depend on households having more money to spend. If wages pick up, the prime minister will have a strong argument to implement a tax increase that has already been signed into law. On present evidence, though, that’s far from certain. An index of inflation-adjusted wages is down almost 3 percent since Abe took charge two years ago.

Abe could use a fresh electoral mandate to speed up economic reform. But if those changes fail to hit their mark, it’s unlikely that ultra-loose monetary policy alone will boost ageing Japan’s sagging potential to generate higher output and incomes. In that case, Abe’s promises of fiscal correction will be as empty in April 2017 as they are today.

 

Email a friend

Please complete the form below.

Required fields *

*
*
*

(Separate multiple email addresses with commas)