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| Japan Sales Tax to Increase Next Year, Abe Says | Japan Sales Tax to Increase Next Year, Abe Says |
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| TOKYO — Prime Minister Shinzo Abe said Tuesday that he would raise Japan’s nationwide sales tax rate next year as planned, sweeping aside concerns that an increase might put the brakes on the country’s nascent economic recovery. | |
| To buffer against an economic slowdown, Mr. Abe is also expected to announce a sizable stimulus package that would pump back into the economy more than half of the roughly 8.1 trillion yen, or about $88 billion, in revenue the government expects to raise during the first year. | To buffer against an economic slowdown, Mr. Abe is also expected to announce a sizable stimulus package that would pump back into the economy more than half of the roughly 8.1 trillion yen, or about $88 billion, in revenue the government expects to raise during the first year. |
| Mr. Abe told leaders of the governing coalition that he would raise the tax rate to 8 percent from 5 percent in April 2014, citing the need to “maintain confidence” in Japan’s fiscal health and pay for the country’s growing number of elderly citizens. | Mr. Abe told leaders of the governing coalition that he would raise the tax rate to 8 percent from 5 percent in April 2014, citing the need to “maintain confidence” in Japan’s fiscal health and pay for the country’s growing number of elderly citizens. |
| By combining a tax increase with government stimulus, Mr. Abe is signaling to global investors that Japan will start taking concrete steps to rein in its colossal debt, but that it is also prepared to take ample measures to shore up the economy. Earlier this year, national debt topped 1 quadrillion yen, or $10 trillion, for the first time — more than twice the size of Japan’s economy, and larger than the economies of Germany, France and Britain combined. | By combining a tax increase with government stimulus, Mr. Abe is signaling to global investors that Japan will start taking concrete steps to rein in its colossal debt, but that it is also prepared to take ample measures to shore up the economy. Earlier this year, national debt topped 1 quadrillion yen, or $10 trillion, for the first time — more than twice the size of Japan’s economy, and larger than the economies of Germany, France and Britain combined. |
| Mr. Abe “hopes to have his cake and eat it too,” Tobias Harris, an associate at the New York based financial advisory company, Teneo Intelligence, said in a note. “By going through with the tax increase, he will signal to investors and the international community that his government is serious about tackling Japan’s deficits and debt. But by returning most of the revenue to businesses and individuals he will show that his government is still focused on triggering sustainable growth.” | Mr. Abe “hopes to have his cake and eat it too,” Tobias Harris, an associate at the New York based financial advisory company, Teneo Intelligence, said in a note. “By going through with the tax increase, he will signal to investors and the international community that his government is serious about tackling Japan’s deficits and debt. But by returning most of the revenue to businesses and individuals he will show that his government is still focused on triggering sustainable growth.” |
| Mr. Abe’s decision comes as Japan’s long-underperforming economy shows signs of sustained growth, bolstered by the aggressive monetary policies of the Bank of Japan — policies pushed by Mr. Abe. The stance of the Bank of Japan, the central bank, has also helped weaken the yen, which has been a boon to the country’s exporters. | Mr. Abe’s decision comes as Japan’s long-underperforming economy shows signs of sustained growth, bolstered by the aggressive monetary policies of the Bank of Japan — policies pushed by Mr. Abe. The stance of the Bank of Japan, the central bank, has also helped weaken the yen, which has been a boon to the country’s exporters. |
| Earlier Tuesday, the bank’s Tankan survey showed sentiment among Japan’s big manufacturers improved in the three months through September for the third consecutive quarter. Last month, the government revised up Japan’s gross domestic product growth rate for the April-June quarter to an annualized 3.8 percent, far higher than its initial reading of 2.6 percent, thanks to robust capital investment. | Earlier Tuesday, the bank’s Tankan survey showed sentiment among Japan’s big manufacturers improved in the three months through September for the third consecutive quarter. Last month, the government revised up Japan’s gross domestic product growth rate for the April-June quarter to an annualized 3.8 percent, far higher than its initial reading of 2.6 percent, thanks to robust capital investment. |
| Consumer prices rose 0.9 percent in August from a year earlier, indicating that Japan is emerging from 15 years of deflation, the damaging decline in prices that has sapped the country’s ability to grow. A successful bid by Tokyo to host the 2020 Summer Games has added to hopes of a Japanese economic resurgence. | Consumer prices rose 0.9 percent in August from a year earlier, indicating that Japan is emerging from 15 years of deflation, the damaging decline in prices that has sapped the country’s ability to grow. A successful bid by Tokyo to host the 2020 Summer Games has added to hopes of a Japanese economic resurgence. |
| Mr. Abe has pressed Japanese companies to respond to the economic upswing by swiftly raising wages and expanding employment. He worries that if there is no flow of wages from the corporate sector, households will be hit by a one-two punch of a higher sales tax and rising prices, freezing personal consumption. | Mr. Abe has pressed Japanese companies to respond to the economic upswing by swiftly raising wages and expanding employment. He worries that if there is no flow of wages from the corporate sector, households will be hit by a one-two punch of a higher sales tax and rising prices, freezing personal consumption. |
| If spending does slump, hurting growth, Japan could relive its nightmare of 1997, the last time the country raised the sales tax rate, to 5 percent from 3 percent. Japan fell into a deep recession after that, though many economists attribute the downturn to the Asian financial crisis and the weakness of Japan’s banking sector at the time. | If spending does slump, hurting growth, Japan could relive its nightmare of 1997, the last time the country raised the sales tax rate, to 5 percent from 3 percent. Japan fell into a deep recession after that, though many economists attribute the downturn to the Asian financial crisis and the weakness of Japan’s banking sector at the time. |
| And though ratings for Mr. Abe, who leads the governing Liberal Democratic Party, hover close to 70 percent,raising taxes is dangerous political territory. A survey taken late last month by the Nikkei business daily showed public opinion split evenly on raising the sales tax rate to 8 percent, with 47 percent in favor and 48 percent opposed. | |
| Trickier still is a plan pushed by Mr. Abe to hasten the expiration of a surcharge on Japan’s corporate tax, implemented by the previous government to cover reconstruction costs in the wake of Japan’s tsunami and nuclear disaster of 2011. Removing the surcharge, originally set to expire in 2015, would bring Japan’s effective corporate tax rate down to 35 percent from 38 percent. The move, Mr. Abe has said, would further bolster the country’s competitiveness and encourage more foreign corporations to bring their operations to Japan. | |
| But lawmakers within the ruling coalition have expressed worries that lowering taxes for corporations, while raising them for households and taking away funds for reviving Japan’s devastated coastline, could trigger a public backlash. Both the Liberal Democrats and their junior coalition partner, the Komeito, have so far only said they would study the issue before reaching a decision before the end of the year. | |
| Economists remain divided on whether a rise in the sales tax rate will depress the economy in the long run. According to a recent survey of forecasts by the Japan Center for Economic Research, the most pessimistic economists predict economic growth to grind to a halt in the third quarter of 2014, after the tax rate is raised. But over all, the roughly 40 private economists forecast growth to remain above 1 percent despite a higher rate. | |
| “Although we think a hike in the consumption tax rate will not necessarily cause the Japanese economy to stall, we cannot rule out some kind of negative impact,” Tomo Kinoshita, chief economist for Japan at Nomura, said in a note to clients Tuesday. “In order the avoid this, the government could well implement additional measures such as tax breaks and public works at the same time that it hikes the consumption tax.” | |
| Many economists say much hangs on Mr. Abe’s promised economic reforms, including liberalizing Japan’s labor market and joining a pan-Pacific trade pact that would lower tariffs on imports. Opponents, however, warn those policies will bring upheaval and inequality to a country that tends to value equality over growth. | |
| Still, Mr. Abe’s popularity, cemented by a landslide victory in parliamentary elections in July, could help him push these reforms through, said Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets. Mr. Abe may not have to face election for three years. | |
| With elections won, “the gloves are off on structural reform,” Mr. Smith said. | |
| Mr. Abe was scheduled to elaborate on his plan to raise taxes and his stimulus package later Tuesday in a televised address. Last week in New York, Mr. Abe met with investors to drive home how well Japan’s economic recovery was going, saying in a speech at the New York Stock Exchange that economic conditions back home were “exceptionally good,” and urging investors to “buy my Abenomics,” a moniker given to his economic policies. | |
| The tax increase, which would happen on April 1, is set to be followed by a second increase in October 2015 that would take the sales tax rate to 10 percent. That is still lower than the average among nations of the Organization for Economic Cooperation and Development, of which Japan is a member, of 18 percent. | The tax increase, which would happen on April 1, is set to be followed by a second increase in October 2015 that would take the sales tax rate to 10 percent. That is still lower than the average among nations of the Organization for Economic Cooperation and Development, of which Japan is a member, of 18 percent. |
Makiko Inoue contributed reporting from Tokyo. |