Japan Tax Hike Will Mean Failure of Abenomics, Abe Ally Says

(Bloomberg) -- Japanese Prime Minister Shinzo Abe should postpone a sales tax increase set for October or face the failure of Abenomics, his six-year economic revival program, according to one of the architects of that program.

“Abenomics will fail for real if the tax is raised now,” Etsuro Honda, a former economic adviser to Abe, said in an interview Wednesday.

Honda has convinced Abe to postpone the tax increase twice before and said he is determined to do so again. He said the rise should be put on hold until the Bank of Japan’s 2% inflation target is reached. Raising the tax now would make it impossible to achieve that target -- a key part of efforts to achieve sustainable growth, he said.

Abe and his ministers have repeatedly insisted the tax will rise to 10% from 8% as planned unless there is a crisis on the scale of the global financial crisis.

However, Honda said Abe seems to be contemplating delaying the increase. He met with Abe at the prime minister’s residence last month and delivered a PowerPoint presentation on the issue. Abe met with other economists last week, adding fuel to speculation about a postponement.

The debate over the tax hike grew more complicated when data released Monday showed Japan’s economy unexpectedly grew in the first quarter, a somewhat misleading sign of resilience. Chief Cabinet Secretary Yoshihide Suga said Wednesday that economic fundamentals are “solid” in delivering the latest message that there is no change in the tax plan.

Still, key elements of the economy -- exports, industrial production and capital spending -- are in decline, and rising trade tensions are adding to uncertainty about the outlook.

Koichi Hagiuda, another Abe ally and senior ruling party member, has suggested that bad economic data could put the tax hike on hold and that any decision to postpone it would need to come before upper house elections due in July.

Those in favor of delaying the tax increase say it would derail a fragile economic recovery made more vulnerable by slowing growth overseas. The last increase, in April 2014, sent consumption into a tailspin and the economy into contraction. Proponents say it would be a vital source of extra revenue needed to address the developed world’s largest public debt burden.

Decision Time

Honda said he expects Abe to decide by the end of a Group of 20 summit in June. Abe laid the groundwork for the last postponement at a Group of Seven meeting in Japan in 2016, arguing that Japan faced the risk of an economic crisis if the tax went up.

Similarly, it wouldn’t take an existing crisis for Abe to justify a postponement this time, because the tax increase itself could create one, Honda said. It may not hit the global economy as badly as the financial crisis did, but it could hurt the domestic economy as much -- about a 3 percent contraction in annual gross domestic product, he said.

“You can’t completely deny the possibility that the impact of the tax hike on Japan’s economy could be similar to the one we saw after the Lehman shock,” Honda said, referring to the Japanese shorthand for the global financial crisis. “The phrase ‘Lehman-like crisis’ should be understood as a metaphor for very serious risk.”

With momentum toward the inflation target already stalled, the tax hike would end progress toward completing the "virtuous cycle" of higher wages, spending and inflation by hitting consumer spending power, resulting in lower consumption and weakening corporate sentiment and investment, Honda said. It would be extremely hard to recover, he said.

Honda argued for an aggressive rise in fiscal spending, saying it has become clear that the BOJ alone can’t achieve a permanent escape from deflation, and must now carefully watch the side effects of its six-year stimulus program.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;Emi Urabe in Tokyo at eurabe@bloomberg.net

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

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