Japan Lawmakers Fret Over Looming Tax Hike in Weak Economy

(Bloomberg) -- Signs of a weakening Japanese economy are fueling concerns among some ruling party lawmakers that the country cannot cope with an increase in an unpopular sales tax in October, after previous hikes hurt growth and derailed political careers.

Prime Minister Shinzo Abe has backtracked twice from a pledge to raise the tax to 10% from 8%, and there is speculation he could change his mind yet again ahead of an upper house election expected in July. Japan’s economic performance last quarter may affect his decision, with gross domestic product data on Monday forecast to show a contraction.

“May 20 is the day of destiny,” said Shigeharu Aoyama, an upper house lawmaker with Abe’s Liberal Democratic Party. “If GDP is negative, I think the judgment will change greatly. On the other hand, if it’s zero or even slightly positive, it may be extremely difficult to put it off, ” he said.

Poor economic data could put the tax hike on hold, senior LDP lawmaker and Abe confidant Koichi Hagiuda suggested, even as Cabinet ministers reiterated the increase would go ahead and a party policy document issued last week echoed that view.

Japan has gradually increased the sales tax to rein in debt that’s ballooned to become the largest in the developed world, in part because of social-security costs associated with its aging population. Advocates of the hike say any further delay would risk a credit downgrade, while opponents are adamant it would damage the economy.

With the fallout from the U.S.-China trade war and rising tensions in the Middle East expected to affect the economy, it would be a particularly bad time to increase the tax again this year, Aoyama said. Japan’s March coincident index, one of the broadest indicators of economic activity, pointed to a worsening of conditions.

‘Weigh on Consumption’

“Objectively, it’s more reasonable to postpone the sales tax,” he said. “It will definitely weigh on consumption.”

While Japan’s opposition parties are calling for a postponement, few within the ruling coalition are willing to openly say the same after the government put together a budget based on the assumption it would go ahead. Part of the revenue is earmarked to fulfill pledges such as making preschool childcare free.

Japan is readying the October sales tax increase, Economy Minister Toshimitsu Motegi told national broadcaster NHK on Sunday. The hike will help enrich social security and education services in the country, he said. Companies and local governments are “making smooth preparations” for it.

A poll conducted by the Nikkei newspaper earlier this month found 52% of respondents were opposed to the hike, compared with 47% in a March survey. About 41% approved of it, down from 45% in the previous poll. In a separate poll by Kyodo News conducted May 18 and 19, 58% of respondents said they opposed increasing the tax, compared with 38% who supported the hike.

Raising taxes before Japan has shaken off deflation is “incomprehensible,” Shouji Nishida, another LDP lawmaker who has publicly opposed the increase, said in a video on his website. Nishida is a proponent of Modern Monetary Theory, which argues that countries with their own central banks and borrowing in their own currencies can’t go broke, and don’t need to worry about overspending so long as it’s not generating high inflation.

“If you understand this, you will realize that it’s not true to say Japan’s in a fiscal crisis,“ said Hiroshi Ando, another LDP advocate of MMT. He has in the past petitioned Abe to put off the tax increase, but has held his fire this year.

--With assistance from Ma Jie.

To contact the reporters on this story: Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net;Emi Nobuhiro in Tokyo at enobuhiro@bloomberg.net

To contact the editors responsible for this story: Brendan Scott at bscott66@bloomberg.net, ;Shamim Adam at sadam2@bloomberg.net, Colin Keatinge, John McCluskey

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