Japan’s Abe Rolls the Dice on His Political Legacy With Tax Hike
Shinzo Abe, Japan’s prime minister, speaks during the UN General Assembly meeting in New York, U.S. (Photographer: Jeenah Moon/Bloomberg)

Japan’s Abe Rolls the Dice on His Political Legacy With Tax Hike

(Bloomberg) -- Shinzo Abe will almost certainly become Japan’s longest-serving prime minister next month. Whether he’ll be remembered as a success could well hinge on how the country’s economy weathers what happens today.

Legislation raising Japan’s sales tax to 10% from 8% took effect Tuesday, a long-planned step intended to help the government rein in the world’s largest public debt load. But it’s a risky one -- past tax hikes have tanked the economy and derailed political careers.

Japan’s Abe Rolls the Dice on His Political Legacy With Tax Hike

“This tax hike will be a major part of Abe’s legacy,” said Tomo Kinoshita, global market strategist at Invesco Asset Management Ltd. “Abe is making a very important step forward for Japan’s dire fiscal conditions and this couldn’t be done without him standing on firm political ground.”

Abe has plowed ahead with the tax increase despite global economic jitters, trade tensions and an upper house election in July. If he pulls it off without major damage to the economy or his public support, the three-straight-term Liberal Democratic Party leader will gain bragging rights that he cracked the formula needed to pass measures to fix Japan’s finances.

In his first comments after the hike took effect, Abe reiterated a line he used frequently leading up to the increase, namely that the government is paying close attention to its effect and has ample measures to make sure the increase doesn’t hurt the world’s third-largest economy.

“In the long term, the biggest problem facing Japan is the low birthrate and the aging population,” Finance Minister Taro Aso, a key architect of the government’s tax hike policy, said Tuesday. “This arrangement is absolutely necessary to build a social security system for all generations.”

Abenomics

Seven years ago, Abe assumed leadership of a country struggling through stagnant growth, a rapidly aging population and a mountain of debt spent battling deflation in the 1990s. His signature “Abenomics” program coincided with a global upswing that’s helped the country break out of the malaise, fueling corporate profits and stock market growth.

Abe has twice delayed the sales tax increase for fear that the economy might not withstand the blow, most recently ahead of an election in 2016. The last hike in 2014 dragged down consumption and prices, shrank the economy by more than 7% and forced the Bank of Japan to expand its stimulus.

Japan’s Abe Rolls the Dice on His Political Legacy With Tax Hike

The current measure is estimated to bring in 5 trillion yen ($46 billion) annually, of which 1.9 trillion yen will go to paying down debt. The plan survived its first big test in July when the LDP-led government came out as the big winner in the upper house election.

But victory has come at a cost. The government pledged to put part of the proceeds of the tax toward popular programs like subsidizing education and childcare fees, helping soften the blow and weaken political opposition.

The tax increase is now expected to reduce economic output by 2.7% this quarter, according to economists surveyed by Bloomberg, or less than half the impact of the previous hike. A poll published by the Nikkei newspaper on Sept. 13 found that 52% of respondents approved of the hike, while 42% disapproved.

“If this tax increase is overcome safely, it will be a barometer that shows the stability of the current administration,” said Masahiko Shibayama, a leading member of the ruling party’s Policy Research Council. Success could open the door to other Abe policy priorities, such as revising the country’s pacifist constitution.

Record Setter

On Tuesday morning, clerks were busy lining store shelves with new price tags and commuter stations unveiled maps showing revised train fares. If the government has gotten its calculations wrong, one of the first signs could come on Nov. 1, with the release of vehicle sales data for October.

Abe’s government has tried to cushion the blow for the big-ticket items that are a key driver of consumption through a complicated revision of the various taxes on autos -- a move aimed at keeping the end price relatively stable after the sales tax increased.

LDP members are confident that the government will be able to absorb the hit as Abe prepares to overtake Premier Taro Katsura, who was in office a century ago, as the country’s longest-serving elected leader on Nov. 20. His current term as ruling party chief expires in September 2021, although a fiscal win could give him support to push through rule changes for an unprecedented fourth term.

Abe could still see his plans torn asunder by a slowing global economy that has been dented by the trade war between the U.S. and China -- his country’s biggest trade partners. In New York last week, Abe said he won assurances from President Donald Trump that he wouldn’t implement tariffs on Japan’s $50 billion worth of cars and parts it sends to the U.S., but their joint statement didn’t definitively end the tariff threat.

Japan’s Abe Rolls the Dice on His Political Legacy With Tax Hike

In another possible warning sign, Japan’s factory activity shrank at the fastest pace in seven months last month. Japanese manufacturers’ confidence fell to the lowest level in more than six years, the Bank of Japan’s Tankan survey showed Tuesday. Slowing demand overseas has made the economy more dependent on consumer spending, which is likely to take a hit from the sales tax hike.

“Even a 2% difference adds up so that your outgoings will be bigger,” said Tomoyo Fukumori, a 30-year-old office worker in Tokyo. “I will rethink my everyday spending.”

©2019 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.