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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 sales tax next year as planned in a bid to tackle the country’s enormous debt, sweeping aside concerns that an increase might put the brakes on the country’s nascent economic recovery. | TOKYO — Prime Minister Shinzo Abe said Tuesday that he would raise Japan’s sales tax next year as planned in a bid to tackle the country’s enormous debt, sweeping aside concerns that an increase might put the brakes on the country’s nascent economic recovery. |
| To buffer against a slowdown, Mr. Abe also announced a stimulus package of roughly 6 trillion yen, or $61 billion, that would pump back into the economy much of the 8.1 trillion yen in revenue the government expects to raise during the first year of the tax increase. | To buffer against a slowdown, Mr. Abe also announced a stimulus package of roughly 6 trillion yen, or $61 billion, that would pump back into the economy much of the 8.1 trillion yen in revenue the government expects to raise during the first year of the tax increase. |
| In a televised news conference, Mr. Abe said he would stick to a plan put in place by the previous government to raise the sales tax rate next April to 8 percent from 5 percent, citing the need to “maintain confidence” in Japan’s fiscal health and pay for the country’s growing number of elderly citizens. | In a televised news conference, Mr. Abe said he would stick to a plan put in place by the previous government to raise the sales tax rate next April to 8 percent from 5 percent, citing the need to “maintain confidence” in Japan’s fiscal health and pay for the country’s growing number of elderly citizens. |
| “If we raise taxes now, would consumption slump, and would the Japanese economy sink back into the deep valley that is economic morass and deflation?” he said. “I pondered these questions until the very end. But there is no road left for us but to grow our economy and to rebuild our finances at the same time.” | “If we raise taxes now, would consumption slump, and would the Japanese economy sink back into the deep valley that is economic morass and deflation?” he said. “I pondered these questions until the very end. But there is no road left for us but to grow our economy and to rebuild our finances at the same time.” |
| 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 and that it is 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. That level of borrowing raises concerns that investors could one day lose confidence in Tokyo’s ability to service its debt, which could set off a crisis with grave consequences for the global economy. | |
| Mr. Abe “hopes to have his cake and eat it too,” Tobias Harris, an associate at Teneo Intelligence, a financial advisory company based in New York, 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 Teneo Intelligence, a financial advisory company based in New York, 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.” |
| The sales tax increase, which would begin April 1, is set to be followed by a second increase in October 2015 that would take the rate to 10 percent, though the plan allows the government to review the state of the economy before raising the tax again. Even the higher rate would still be lower than the average of 18 percent among nations in the Organization for Economic Cooperation and Development, of which Japan is a member. | |
| 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 that sentiment among Japan’s big manufacturers had improved in the three months through September, for the third consecutive quarter. Last month, the government revised upward 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 that sentiment among Japan’s big manufacturers had improved in the three months through September, for the third consecutive quarter. Last month, the government revised upward 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 Olympics 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 Olympics 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 not to taxes but 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 not to taxes but to the Asian financial crisis and the weakness of Japan’s banking sector at the time. |
| And though popularity 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. | And though popularity 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 aftermath of the earthquake, 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. | 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 aftermath of the earthquake, 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 could cause a public backlash. Both the Liberal Democrats and their junior coalition partner, the Komeito, have so far said only that they would study the issue. On Tuesday, Mr. Abe promised that tax cuts for corporations would be conditional on visible improvement in wages and job opportunities, which have stagnated for over a decade. | But lawmakers within the ruling coalition have expressed worries that lowering taxes for corporations while raising them for households could cause a public backlash. Both the Liberal Democrats and their junior coalition partner, the Komeito, have so far said only that they would study the issue. On Tuesday, Mr. Abe promised that tax cuts for corporations would be conditional on visible improvement in wages and job opportunities, which have stagnated for over a decade. |
| 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 the higher rate. | 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 the 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.” | “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.” |
| There are concerns, however, about a return of Japan’s pork-barrel public works projects that riddled the country with roads and bridges in the 1990s, which may have propped up a faltering economy but did little to lay the foundations of sustainable economic growth. | There are concerns, however, about a return of Japan’s pork-barrel public works projects that riddled the country with roads and bridges in the 1990s, which may have propped up a faltering economy but did little to lay the foundations of sustainable economic growth. |
| Mr. Abe said his stimulus package would be different. According to an outline released by the government Tuesday, the stimulus includes 5 trillion yen for pro-growth measures like lower investment taxes, more funding for venture capital funds and promoting younger people and women in the workplace. He said he had also put aside additional money to ease the pain of higher taxes on middle- and low-income households, including 300 billion yen in handouts to the poorest families and 50 billion yen in housing assistance for disaster victims. | Mr. Abe said his stimulus package would be different. According to an outline released by the government Tuesday, the stimulus includes 5 trillion yen for pro-growth measures like lower investment taxes, more funding for venture capital funds and promoting younger people and women in the workplace. He said he had also put aside additional money to ease the pain of higher taxes on middle- and low-income households, including 300 billion yen in handouts to the poorest families and 50 billion yen in housing assistance for disaster victims. |
| “These policies do not seek merely to spark temporary growth,” he said. “They seek to promote investment, raise pay and create jobs.” | “These policies do not seek merely to spark temporary growth,” he said. “They seek to promote investment, raise pay and create jobs.” |
| Many economists say much hangs on Mr. Abe’s promised economic policy changes, including liberalizing Japan’s labor market and joining a Pacific trade pact that would lower tariffs on imports. Opponents, however, warn those policies will bring upheaval and inequality to a country that has tended to value equality over growth. | Many economists say much hangs on Mr. Abe’s promised economic policy changes, including liberalizing Japan’s labor market and joining a Pacific trade pact that would lower tariffs on imports. Opponents, however, warn those policies will bring upheaval and inequality to a country that has tended 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 changes through, said Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets. Mr. Abe may not have to face election for three years. | Still, Mr. Abe’s popularity, cemented by a landslide victory in parliamentary elections in July, could help him push these changes 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. | With elections won, “the gloves are off on structural reform,” Mr. Smith said. |
Makiko Inoue contributed reporting from Tokyo. | Makiko Inoue contributed reporting from Tokyo. |