Abe puts off tax hike to mute shocks to faltering economy

AP News
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Posted: Jun 01, 2016 6:30 AM
Abe puts off tax hike to mute shocks to faltering economy

TOKYO (AP) — Prime Minister Shinzo Abe said Wednesday he is postponing a sales tax hike planned for next year to help nurse along Japan's faltering economic recovery.

Abe announced the decision to push the tax hike back to October 2019 from the earlier plan to raise it in April 2017. The rate would rise to 10 percent from 8 percent.

The planned increase was unpopular with voters but seen as crucial for trimming Japan's gigantic public debt, which is more than twice the size of its economy.

Abe said the global economic outlook was too uncertain to risk another economic downturn by raising the tax. The last increase, in 2014, put the economy into recession.

"I have decided that the consumption tax increase, which could pose a risk of hurting domestic demand, needs to be postponed," he said in a nationally televised news conference.

"We must be prepared for risks, and we must acknowledge the risks accurately and take appropriate measures to avoid them becoming a crisis," he said.

Japan, the world's third-largest economy, has seen its growth stall as the population shrinks and ages and manufacturers shift production overseas to faster growing markets. Abe's strategy of using extreme monetary easing to vanquish deflation has made only limited progress in spurring consumer spending and corporate investment, though he pointed to strong jobs growth and wage increases as signs his policies are on the right track.

"Although we are still only halfway there, Abenomics has achieved positive results," Abe said. "You cannot say Abenomics is a failure."

The postponement of the tax hike will likely help the Liberal Democrats in a July 10 election for the upper house of parliament. By October 2019, Abe will have left office, unless party rules are changed.

Economists and finance ministry officials say the tax needs to rise to 20 percent or more to restore national finances and cover the soaring costs of caring for the elderly.

Not everyone was pleased by Abe's decision.

Akio Mimura, chairman of the Japan Chamber of Commerce and Industry, said the delay was unacceptable.

"If a sales tax hike cannot be achieved two and half years later, Japan will be bankrupt," he said.

But those favoring a delay argued the recovery is too weak to endure a fresh hit to consumer spending from a tax hike that could actually cause government revenues to contract.

The sales tax increase originally was slated for October 2015. But growth has been uneven since the tax was raised to 8 percent from 5 percent in April 2014, and Abe initially postponed it to April 2017. He acknowledged Wednesday that he had broken a promise not to delay the tax hike for a second time and said he took such criticism seriously.

The impact of the April 2014 tax hike, which occurred as inflation ticked up to 1.5 percent, was "beyond everyone's expectations," said Sayuri Shirai, a former central bank board member and professor at Tokyo's Keio University. "It was a big shock to households because they are not used to such price hikes."

By again postponing the tax hike again, Japan risks having its credit downgraded. However, most of its debt is owned by domestic investors, who are unlikely to dump their holdings of Japanese assets.

The delay is raising questions over how to finance government spending commitments due to be paid for by the tax increase, including payments of stipends to low-income pensioners, subsidies for elder care and scholarships, and pay increases for nursing and childcare workers.

Abe has reportedly rejected the idea of dissolving the lower house of Parliament and holding a snap election in July, when Japan is due to hold a vote for the less powerful upper house.