Why Abe Should Postpone the Tax Hike

(Bloomberg Opinion) -- With Japan’s economy softening, its central bank needs to at least consider further steps to support growth. There’s one major hurdle, however, and only Prime Minister Shinzo Abe can remove it.

A 2 percent hike in consumption tax, scheduled for October, would shore up Japan’s fiscal position and thus its ability to pay for an aging population. Yet this plan hampers the central bank’s ability to weigh additional stimulus. Any admission by the Bank of Japan that things are looking bleak would undercut the case for going forward with the tax rise and put the central bank squarely in the middle of a domestic political squabble. Central banks the world over are wary of that gray zone.

It’s time for Abe to break the deadlock by postponing the hike.

The increase risks pulling the economy in the wrong direction at the wrong time. Monetary policy is drifting, growth is slackening, and inflation isn’t close to the hallowed 2 percent target. The BOJ needs more flexibility to address these problems.

While Abe loaded the planned tax hike with exemptions and pledged to devote some of the revenue to education, it’s becoming a trickier sell politically, too. The ruling party, for one, may not even want it, despite the best efforts of government ministers to defend it.

Back in February, the tax increase already had a target painted on its back. The fallout from China’s slowdown and Donald Trump’s trade war with Beijing was just beginning to bite. With the global slowdown, economists are now flagging a possible contraction in gross domestic product later this year. That target keeps getting bigger.

The last hike, in 2014, was widely blamed for pushing the economy into recession. That’s made lawmakers skittish about another step; a top official from Abe’s Liberal Democratic Party, Koichi Hagiuda, was probably speaking for many when he said last week the economy may be too weak to proceed. The cabinet went into damage-control mode and Hagiuda dutifully walked back his remarks. But Hagiuda isn’t some obscure backbencher; he’s the acting secretary-general of the LDP. I doubt he simply misspoke.

True, there’s never a grand time for a tax hike. Japan’s society is aging and its workforce is shrinking, meaning income taxes won’t be sufficient to support the things Japanese people want and have come to expect: great infrastructure and a social safety net.

But some times are worse than others. Abe likely regrets saying last year that only a Lehman-style slump would defer a tax increase. There’s little chance of a cataclysm on that scale occurring between now and October. No matter: He should admit defeat on this one, and soften the blow by packaging the move as an insurance policy against a deeper economic chasm. Watch for Abe-aligned politicians to start talking about a dimmer outlook.

As for the BOJ, it’s likely to trim growth forecasts a tad this week when officials set interest rates at their monthly meeting. It’s a fair bet Kuroda will be peppered with questions about taxes as much as monetary policy when he holds his post-meeting press conference. He can fudge for a while, but not for too long.

That fire is better aimed at the prime minister. Come on, Abe. Give a central banker a break.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2019 Bloomberg L.P.