Japan's prime minister delays sales tax hike to 2017, calls snap election

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TOKYO — Japan's Prime Minister Shinzo Abe called a snap election for December and put off a sales tax hike planned for next year, seeking a renewed mandate for his all-or-nothing policies to end two decades of economic stagnation.

Despite those policies, the Japanese economy slipped into a recession last quarter after a sales tax increase in April crushed consumer and business spending. That forced Abe to delay the second hike planned for October next year until April 2017.

Abe said Tuesday he will dissolve parliament on Friday. He wants an election as soon as possible, which would be mid-December, to seek public approval for his tax decision and for his overall "Abenomics" policies of extreme monetary easing, heavy government spending and economic reforms. The government and the Bank of Japan have pumped hundreds of billions of dollars into the economy in the two years since Abe was elected.

"I realize this election will be tough, but I need to hear the voice of the people," Abe told a news conference. "I will step down if we fail to keep our majority because that would mean our Abenomics is rejected."

The delay in raising the sales tax to 10 percent from the current 8 percent will slow Japan's work on repairing its tattered public finances. But Abe said the risk to the world's third-largest economy was a bigger threat.

Fresh elections may seem a puzzling decision given Abe is only half way through his term and the latest economic news is dismal. However Abe's ruling Liberal Democrats have a solid majority and hope to further consolidate their power at a time when opposition parties are weak and in disarray.

Abe described his strategies as the "only path" for Japan to escape its economic malaise.

"Some people say Abenomics has failed or it's not performing well," he said. "But then what should we be doing?"

Japan has bubbled with speculation of an early election since early this month.

The Liberal Democrats have been coaching freshman lawmakers on campaign strategies and opposition parties have rushed to discuss possible new alliances, as campaign posters went up in Tokyo neighborhoods.

Abe got a rare second term as prime minister after stepping down just a year into his rocky first term in office in 2006-2007. His support ratings started out high as share prices surged in early 2013. But they have fallen recently. Parliament got bogged down in squabbles over campaign finance scandals that led to resignations of two of his cabinet ministers within weeks of an early September reshuffle.

By dissolving parliament for an election Abe can clear the slate and once again reshuffle his cabinet, said Michael Cucek, a Tokyo-based analyst and fellow at Temple University Japan.

Abe pointed to progress in terms of an improved job market and modest increases in wages for some workers.

"We've kept moving ahead. We must not stop now," he said.

Opposition party leaders, already resigned to Abe's plan, said they could not oppose the delay in the sales tax increase, given the feeble state of the economy.

At over a quadrillion yen ($8.6 trillion), Japan's public debt is the biggest among developed nations and over twice the size of the economy. But since most of the debt is held by the Bank of Japan and other Japanese financial institutions, it is considered relatively stable.

Abe promised the tax increase, which is now slated for 2017, would not be delayed again.

Still, just after Abe's announcement, Fitch Ratings said it would review its assessment of Japan's debt, dubbing the change of plans a "significant development."

Japanese media had reported that Abe was planning new stimulus measures, but he offered no new specific plans Tuesday.

The decision to push ahead with April's increase in the sales tax to 8 percent from 5 percent, has been judged a miscalculation by some of Abe's advisers, including Koichi Hamada, a former Yale University economics professor who helped draft Abe's policies and who had lobbied for more gradual increases.

"It looks like the Japanese economy was hit by some body blow," said Hamada.

"The level of the consumption tax is not so high, but the increase was rather drastic. It really counteracted Abenomics."

Eventually, Japan must boost taxes to cover rising costs for health and elder care in this aging society.

"The Japanese government is doing a kind of Ponzi game," Hamada said. "Usually a Ponzi scheme doesn't work in the private economy, but the government always has the next generation of taxpayers to rely on," he said.


Mari Yamaguchi in Tokyo contributed.

Elaine Kurtenbach on Twitter: http://www.twitter.com/ekurtenbach

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