Published in Financial Times on October 20, 2014

October 24, 2014

Abe balances tax rise against economic damage

Shinzo Abe has hinted that he may delay increasing Japan’s consumption tax, saying the move would be “meaningless” if it inflicted too much damage on the country’s economy.

In an interview with the Financial Times, Japan’s prime minister, said the planned tax increase from 8 per cent to 10 per cent was intended to help secure pension and health benefits for “the next generation”. But he added: “On the other hand, since we have an opportunity to end deflation, we should not lose this opportunity.”

The Japanese economy shrank 7.1 per cent between April and June compared with a year ago after Mr Abe’s government raised consumption tax from 5 per cent to 8 per cent. A second rise has strong backing from the Bank of Japan, the finance ministry, big business and the International Monetary Fund, which all want action to reduce the country’s mountainous debt. A postponement would require a change in the law.

But Mr Abe said: “By increasing the consumption tax rate if the economy derails and if it decelerates, there will be no increase in tax revenues so it would render the whole exercise meaningless.”

His caution shows how much now rides on the strength of the rebound in growth in the third quarter. He is expected to decide on the tax in early December when the final data come in, but early indicators have been disappointing.

Concerns that Mr Abe’s plan to revive the Japanese economy is running out of steam added to gloom over global growth prospects that stirred financial markets around the world last week.

On previous foreign trips, the Japanese prime minister has acted as a confident salesman for his reform programme. He once urged traders at the New York Stock Exchange to “buy my Abenomics”.

But the exuberance has gone from Abenomics. Instead the effort to turn around the Japanese economy is looking like a long, hard, perilous slog.

In Milan, Mr Abe’s manner was sober and even, at times, defensive. He showed flashes of irritation with commentators who have cast doubt on the success of Abenomics.

“I believe there will come a day when the economy will start a virtuous circle that will be felt in every corner of the nation,” he said. “There are always those who criticise, but those people never come up with an alternative.”

He acknowledged more was needed to help companies, particularly small businesses, hit by the weakening of the yen.

“Of course we will keep an eye on those in rural and local areas and SMEs who are hit by the rise in import prices and as necessary it is our intention to take measures,” he added.

But he was also keen to emphasise the successes that he believes Abenomics has achieved – above all in the fight against deflation. “We have done away with deflationary expectations,” he says, adding that wages are now rising and that job vacancies are plentiful. More structural reforms are also promised.

“Liberalisation of the power sector is proceeding” said Mr Abe, “and whereas in the past, nobody even [suggested] reforms of agricultural co-operatives, we’ve made a decision to undertake reform there and in the medical sector and in employment law.”

When it was pointed out that US trade negotiators had openly criticised Japan for failing to proceed with structural reforms to secure a Trans-Pacific Partnership free-trade deal, Mr Abe laughed briefly and opted for a diplomatic response. “We are in the last phase of the negotiations and those are the most difficult.” He added that, in a phone conversation with Barack Obama last week, he and the US president agreed that “we would make maximum effort to conclude this”.

The foreign leader that Mr Abe would most like to speak to, however, is probably Xi Jinping, the president of China. Tensions between Japan and China remain high. The two countries continue to jostle over disputed islands in the East China Sea. Beijing is also bitterly critical of the Abe government’s treatment of history and of visits paid to the Yasukuni war shrine in Tokyo, by the prime minister himself and by colleagues.

Mr Abe has repeatedly requested a meeting with the Chinese president and has so far been rebuffed. In Milan, he reiterated his hope that a bilateral meeting with Mr Xi could take place at the Apec summit in Beijing, next month, while saying that Japan could not agree to “pre-conditions” – an apparent reference to China’s demand that Mr Abe promise never to visit Yasukuni again.

Picking his words carefully, Mr Abe refused to comment in detail on the military situation around the disputed islands that Japan calls the Senkakus and that China calls the Diaoyu, saying: “Unfortunately, there are incursions into our territorial waters, but we are dealing with this rationally.”

Mr Abe stressed the mutual economic interests of Japan and China, adding: “It would be good if we could have a heads of government meeting at the Apec summit . . . to deal with contingencies, the defence authorities should have a hot-line . . . If the summit meeting goes ahead, I’d like to call upon China to do this.”

The shadow of Russia’s seizure of the Crimea hangs over China’s territorial dispute with Japan. In the same Milan hotel that Mr Abe was speaking, President Vladimir Putin of Russia was meeting with President Poroshenko of Ukraine. Mr Abe had meetings with both the Russia and Ukrainian leaders in Milan and told the FT: “Japan does not condone changing of the status quo through coercion and intimidation.”

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