Abe’s tax hikes an ever-tougher sell

9 September 2014 By Andy Mukherjee

The Breakingviews Abenomics Index stalled in July. Inflation expectations waned, and wages were flat. If the weakness persists, Prime Minister Shinzo Abe will find it hard to raise the sales tax rate a second time next year, and that could delay much-needed fiscal consolidation.

Context News

The Breakingviews Abenomics Index was 96.68 in July, almost unchanged from 96.65 in the previous month. While the 3 percentage point increase in the sales tax increase in April continued to push consumer prices higher, bond traders’ inflation expectations dipped the most in almost a year.

Among other constituents of the gauge, the current account surplus narrowed and new housing starts fell. Wages were flat.

Meanwhile, bank lending, manufacturing output and consumer spending improved for a second straight month in July. Stock and bond prices rose.

Etsuro Honda, an adviser to Prime Minister Shinzo Abe, recently said that the next sales tax rise should be postponed until April 2017, and even then implemented only if wage rises had caught up with inflation and the BOJ’s inflation target of 2 percent had been met in a sustainable way, Reuters reported on Sept. 1.

A finance ministry representative attending the Bank of Japan’s June 12-13 monetary policy meeting characterized the medium-term fiscal situation as “severe.” The International Monetary Fund estimates Japan’s gross public debt to fluctuate around 240 percent of GDP until 2019.

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