Japan Should Scrap Planned Sales Tax Hike, Says Former Minister

(Bloomberg) -- Prime Minister Shinzo Abe should abandon a scheduled increase in the sales tax this year as it risks pushing Japan’s economy into recession and hampering efforts to generate stable inflation, according to former economy minister Heizo Takenaka.

“Of course a sales tax hike would increase the possibility of a recession,” said Takenaka, who is now a professor at Toyo University. “That’s why managing the economy this year is extremely difficult.”

Takenaka added that focusing on raising revenues through the higher tax was also missing the point that social security reform must come first.

Takenaka’s comments come amid growing concern that the economy may be highly vulnerable when the sales tax rises to 10 percent from 8 percent in October.

While the government has planned more measures to soften the blow from the tax increase than on previous occasions, the economy has a track record of shrinking after hikes.

Economists are already warning that the economy may be contracting in the first quarter as China’s slowdown, trade tensions and cooling of global tech demand squeeze growth.

Takenaka warned that the Bank of Japan doesn’t have much firepower left to stimulate the economy further should it fall into recession.

Reforms First

The higher tax rate would only raise a limited amount of funds for Japan’s ballooning social security payments, given exemptions for essential goods such as food and use of the revenue for free education and the promotion of cashless payment systems, he said.

“The largest problem Japan’s fiscal debt faces is its social security conundrum,” said Takenaka, who worked in the administration of former Prime Minister Junichiro Koizumi. “Unless you cut out the irrational parts of that and conduct reform, nothing will change, barring a sales tax hike up to something like 30 percent.”

Given clear side effects from the BOJ’s easing policy, the government must get on with deregulation that can drive economic growth while it has the opportunity, instead of a potentially deflationary tax hike, he added.

“Japan shouldn’t be raising its sales tax when the 2 percent inflation goal hasn’t been reached, and Japan hasn’t completely escaped from deflation,” said Takenaka. “I don’t think the prime minister wants to do it either.”

--With assistance from Masahiro Hidaka and Toru Fujioka.

To contact the reporters on this story: Yuko Takeo in Tokyo at ytakeo2@bloomberg.net;Emi Urabe in Tokyo at eurabe@bloomberg.net

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Paul Jackson, Henry Hoenig

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