Japanese Prime Minister Shinzo Abe's plan to resuscitate Japan's flat-lining economy has hit a snag that, for veteran Japan-watchers, is painfully familiar.
"Abenomics," the economic platform that swept him to power last December, has since done a reasonable job of instilling more confidence in businesses and investors through aggressive monetary and fiscal stimulus, a weaker yen and a recovery in export profits. The government has been slower to implement the most essential but politically difficult part of its longer-term recovery strategy – productivity-boosting structural reforms, including deregulation of energy and other key markets.
But there is another controversial plank in Abenomics – a doubling of consumption taxes to enable some corporate tax-trimming and help tackle the ballooning budget deficit. Now, after months of overheated debate on the subject, Mr. Abe appears poised to take that step on Tuesday, the same day the Bank of Japan's influential Tankan survey of business sentiment is expected to show confidence at its highest level in three years. That confidence won't last, especially if the promised corporate tax cuts are put on the back-burner, as Finance Minister Taro Aso has signalled.
Hitting consumers in the pocketbook – the two-step tax hike will boost the rate to 8 per cent from 5 per cent next April and to 10 per cent in 2015 – is not the best way to fire up domestic demand. And it won't help Mr. Abe meet his vow to cut the enormous budget deficit in half by 2015, partly because it will be accompanied by about ¥5-trillion ($52.2-billion) in additional stimulus spending, on public works projects spending and other tax measures, to cushion the impact of the added consumption tax burden. So investors lured to Japanese securities by visions of responsible fiscal management coming to the world's third-largest economy are bound to be sorely disappointed.
Various Japanese governments have made just about every mistake in the book – and invented a few of their own – in the course of two decades of economic misery. But one of their most damaging moves remains – wait for it – an increase in 1997 of two percentage points in the consumption tax to 5 per cent. That decision, combined with the depressed property market, turmoil in Asian markets, further weakness in the battered banking sector and a sudden return of deflation, drove the domestic economy to the brink of ruin the following year.
That's not to say the same fate awaits this latest tax hike. But if the principal goal is corralling the world's highest public debt and freeing up more domestic capital for productive investment, the planned sales tax increase won't even make a dent. Analysts say the effective rate would have to be 20 per cent or more to put any sort of brake on the current slide toward a fiscal crisis of frightening proportions.