Japanese Prime Minister Shinzo Abe’s reported postponement of a planned sales tax hike surely will be popular and is perfectly defensible. For it to be truly effective, however, Abe will have to make some harder decisions.
Japanese Prime Minister Shinzo Abe’s reported postponement of a planned sales tax hike surely will be popular and is perfectly defensible. For it to be truly effective, however, Abe will have to make some harder decisions.
The prime minister originally vowed not to backtrack on the tax hike — already delayed once — unless Japan faced a Lehman-style crisis. Although no such crisis appears imminent, the Japanese economy remains weak. Prices are falling again, and growth remains sluggish despite the Bank of Japan’s huge and increasingly unconventional monetary easing program.
The last two sales tax increases, separated by 17 years, both tipped a seemingly recovering economy back into recession. There’s little reason to think a third wouldn’t do the same. It’s unlikely a fragile global economy will have recovered enough by next spring, when the hike was to have taken effect, to offset a major drop in demand at home.
However, Abe’s reported plan for as much as nearly $91 billion in new spending is smart as well. After driving rates into negative territory, with mixed results, the BOJ doesn’t have much wiggle room. If the stimulus money is directed at day-care programs and other measures that benefit younger workers, it could help boost productivity and the number of women in the workforce.
Japan’s debt levels, while dizzyingly high, should be manageable for now given extraordinarily low rates.
The government could ease some worries by looking harder for other ways to start bringing down the deficit.
Still, delaying the tax hike only postpones some pain. It won’t do much to alter Japan’s low-growth, low-inflation future.
Abe needs to regain the narrative. If his Liberal Democratic Party does well as expected in July’s upper-house elections, he should revive serious efforts at privatization and deregulating labor and product markets.
He should look again at ways to increase desperately needed immigration and put more pressure on companies to raise wages.
This is a familiar refrain. Unlike with the sales tax, though, further delay is unwise.
— Bloomberg View