Abe Green-lights Consumption Tax Hike

Prime Minister Abe Shinzō ended months of speculation today with his announcement that Japan’s nationwide consumption tax will be raised from 5% to 8% on April 1, 2014.

In making his decision, the prime minister looked to recent economic figures as a sign that Japan’s economic recovery was robust enough to weather the tax hike. He was encouraged by the September 9 announcement that the country’s GDP grew by a solid annual 3.8% for the April–June quarter.

But Prime Minister Abe was awaiting the Bank of Japan’s Tankan, or Short-term Economic Survey of Enterprises, to make his final decision. Released today, the latest survey found that business confidence is on the rise, sealing the deal for the prime minister.

Japan’s consumption tax only dates back to 1989, when then Prime Minister Takeshita Noboru introduced a 3% tax. But the Japanese public, not surprisingly, has never been overly keen on the tax or the idea of increasing it.

Ten years before its introduction, Prime Minister Ōhira Masayoshi had proposed a consumption tax, but had to drop the idea for fear of a backlash in the general election of October 1979. And Prime Minister Nakasone Yasuhiro had to abandon his effort to push through a sales tax bill in 1987 due to similar political concerns.

In the years since the tax was implemented, any proposal to raise it was fraught with political risks. While not exactly the “third rail” of Japanese politics, the consumption tax has been a sort of hot potato—an issue that most prime ministers prefer to leave to their successors.

The tax has only been increased once: it went to 5% in 1997, under Prime Minister Hashimoto Ryūtarō. In the years since that last hike, there has been talk of raising the tax further, but neither the Liberal Democratic Party nor the Democratic Party of Japan was willing to take responsibility for the issue. In fact, the DPJ rode to power in 2008, in part, on the basis of its pledge to not raise the consumption tax. And the fall of the DPJ in 2010 was due in large measure to then Prime Minister Kan Naoto’s pledge to raise the tax to 10%.

Kan’s successor, Noda Yoshihiko, did manage—as one of his last political acts as prime minister—to push through a bill, with LDP support, allowing a consumption tax increase to 8% in 2014 and to 10% the following year. But the law created as a result stipulated that the tax increase could only go forward if the Japanese economy were strong enough at the time.

Now that Prime Minister Abe has decided that the economy is indeed robust enough to bear an increase, the country will have to wait and see how the higher consumption tax impacts spending and economic growth, and whether it can serve to shrink Japan’s ballooning national debt, which as of June 2013 is in excess of ¥1 quadrillion. (MS)