What to Watch for Signs That Abe Is Reversing on Japan Sales Tax Hike

(Bloomberg) -- Twice before, Japanese Prime Minister Shinzo Abe has backed away from the sort of sales tax hike that toppled at least one predecessor. Now, he faces the same dilemma again.

In five months, Japan is set to raise the levy to 10 percent from the current 8 percent to help ease the developed world’s biggest debt load. If he postpones the move, it would mean his “Abenomics” policies have failed to generate the stable growth he promised more than six years ago. But he could face a similar result if he follows through, buckles the economy and pushes inflation back down to zero.

While Abe insists only a downturn like the 2008 financial crisis could force him to reconsider the increase, speculation about another postponement is growing after a close ally suggested a course correction was possible.

Here are four areas to watch if Abe’s getting cold feet:

1. Public opinion turns

The tax increase has become a political football, with the main opposition parties calling for the plan to be dropped, an idea that may play well with voters in a July upper house election. A March poll by the Asahi newspaper found that 55 percent of respondents were against the increase, compared with 50 percent in November.

Although Abe’s ruling Liberal Democratic Party is far ahead in the polls, he might want to neutralize the potential disadvantage. That would mean he needs to announce an about-face before campaigning begins, probably in early July.

Doing so, however, could force him to abandon the pledges he has made to use some of the revenue to support education and child care for young families, especially those with low incomes. It might also irritate businesses who are pouring resources into managing a complex system of rebates aimed at lessening the tax’s economic effect.

2. Economic data sours

Abe ally and ruling Liberal Democratic Party executive Koichi Hagiuda said April 18 that a third postponement was possible if the results of the Bank of Japan’s Tankan survey in June showed “signs of danger ahead.” The results -- one of the nation’s most widely watched economic indicators -- are set to be published July 1.

Hagiuda later played down the comments as his own personal view. He said that the government had not changed direction and would pay attention to other data, including gross domestic product. The GDP figures, which could show the economy contracted in the first three months of the year, are set to be announced May 20.

In a precursor of that figure, Japan unveiled the biggest quarterly drop in factory output in nearly five years Friday. Japan needs to see a strong recovery in industrial production to help drive economic growth in the lead up to the October tax hike.

3. Economists are summoned

Watch the company Abe’s keeping. Before announcing a delay to the sales tax hike in June 2016, Abe held a series of seven meetings with renowned economists including Nobel laureates Joseph Stiglitz and Paul Krugman, who opposed the move.

Abe also spoke to Krugman before announcing the first postponement in 2014, in a meeting orchestrated by then-economic aide Etsuro Honda, a former Finance Ministry official and opponent of the tax hike who was one of the architects of Abenomics. Honda recently resigned his post as ambassador to Switzerland, potentially leaving him free to return to Abe’s team.

4. Global outlook worsens

The tone of the government’s pronouncements on the global economy has also provided key clues to sales tax plans in the past -- and Abe has even sought backing for his views when hosting world leaders.

In May 2016, Abe tried to persuade the Group of Seven leaders that there was a significant risk of the world economy falling into another major financial crisis if the right policy measures weren’t taken. Days later, he announced a 30-month delay to the tax hike.

With global trade volumes already falling at their fastest pace in a decade, he could cite the effects of China’s economic slowdown or even Brexit to justify a U-turn.

To contact the reporter on this story: Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net

To contact the editors responsible for this story: Brendan Scott at bscott66@bloomberg.net, ;Brett Miller at bmiller30@bloomberg.net, Paul Jackson

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