PM Abe Stares at the Horns of a Tax-Hike Dilemma

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Japanese Prime Minister Shinzo Abe is facing an economic dilemma: aggressively tackle his nation’s massive deficit, or gingerly nurse its frail economic recovery. Tending to one option could easily turn the other into a liability.

At least those are the concerns that Isamu Ueda—a member of the Komeito party that is a key ally in Abe’s coalition government—voiced to reporters late last week, according to a recent Reuters story. Specifically, Ueda said he was unsure of the Prime Minister’s plan to raise Japan’s sales tax in 2015, adding that its potential to offset the deficit is hampered by the risk that it might inhibit economic growth.

Ueda added, “I think conditions are severe for (raising the tax) next October. The risks will be high if we don’t let the economy stabilize a bit more. If the economy relapses, this will all come to nothing. We need to be cautious in deciding this.” The April sales tax hike—from five to eight percent—caused “the deepest contraction in the second quarter since the global financial crisis.”

Abe had initially intended to increase the tax rate to 10 percent in October, but now says that he will revisit the decision in December, cautioning that he wants to see whether or not the “…the economy is strong enough to withstand the second blow.” However, as Economy Minister Akira Amari countered in Business Insider, the tax should still be raised if results from an upcoming analysis show that GDP weakened during the third quarter. Amari added that the tax increase should be coupled with a government stimulus for “private consumption, particularly low-income groups and families with children, hit hard by April’s tax hike to 8 percent from 5 percent.”

Earlier last month, the International Monetary Fund made a pointed request that Japan contend with its deficit. “In Japan, more forceful structural reforms…are needed to boost potential growth and move decisively away from deflation,” warning that steps needed to be taken in order to increase labor supply and deregulate highly-protected agricultural and service sectors.

—Kyle Mullin

Image: Selected Pixels/Flickr

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