By Yuko Yoshikawa
TOKYO, July 29 Japan's most significant fiscal
reform in years - a planned increase in the country's sales tax
- could be delayed or watered down in a move that might rattle
financial markets and ultimately undermine support for the prime
Despite holding the strongest political mandate of any prime
minister in years, there are signs Shinzo Abe is seriously
rethinking the plan out of concern it could derail a nascent
economic recovery he has crafted with an aggressive policy mix,
In the latest sign, Abe has ordered a study of alternatives
for implementing the sales tax increases, including introducing
them more gradually, government sources said.
Abe says he will decide in the autumn whether to proceed
with the first part of the two-stage plan after gauging the
state of the economic recovery, especially GDP data that is due
on Sept 9. The tax, similar to general sales tax and value added
tax in other countries, is due to rise to 8 percent in April
2014 and then 10 percent in 2015.
Abe does not want to raise the tax, given the likely
economic and political repercussions, but he understands the
risks of upsetting the markets by giving the appearance of
backtracking on promised reform, said a person involved in
crafting economic policies. At 5 percent, Japan and Canada have
the lowest equivalent consumption taxes in the Organisation for
Economic Co-operation and Development, OECD data shows.
The stakes in Japan are high. The tax hike was passed into
law last year with the support of Abe's current coalition
parties and the previous government and is meant to be the first
step toward repairing Japan's tattered finances. However, the
law also requires the government to judge the economic
conditions before giving the final go ahead.
Reneging on fiscal reform could hit investor confidence,
which has allowed Tokyo to borrow money cheaply even though its
$5 trillion public debt, well over twice the nation's annual
economic output, is the heaviest burden in the industrial world.
At the same time, Abe has stressed that his top priority is
to rouse Japan from 15 years of deflation and tepid growth
through his Abenomics programme of heavy government spending,
massive monetary easing and promises of a longer-term growth
Abe himself admitted the thorny dilemma just hours after
scoring a landslide win in upper house elections on July 21 that
gave his ruling bloc a clear parliamentary majority.
"It will be a difficult decision," he said of the looming
"The economy is just starting to recover and now is the best
chance for Japan to emerge from deflation," Abe said. "I don't
want to lose this chance. At the same time, markets are watching
(our progress) on Japan's fiscal reform."
Despite his electoral triumph, Abe's team is split.
A small number of vocal reflationists, such as cabinet
office adviser Koichi Hamada, say Abe should prioritise recovery
and go-slow on raising the tax. Pitted against them, the Finance
Ministry says it is vital for Japan to show markets and trading
partners that it is serious about putting its fiscal house in
Three sales tax scenarios will likely be reviewed by the
Council on Economic and Fiscal Policy, a panel of top government
and private sector officials, and possibly by a separate, newly
established panel of experts as well, the government sources
The three scenarios include: the current plan; raising the
rate by 2 percentage points in the first step, and then in
increments of 1 percentage point; and, raising it 1 percentage
The top government spokesman, Yoshihide Suga, did not
comment on whether Abe had ordered a rethink of the hike, but
told reporters Abe will take into account the opinion of various
Public opinion, meanwhile, may play to the advantage of the
A survey of 902 people in the Nikkei business daily,
conducted just after the election, found only 11 percent
supporting the existing plan, compared with 58 percent who
favour "flexibility" in the timing or scale of the increase and
27 percent who oppose raising the tax at all.
History too provides a cautionary tale for Abe, who got a
rare second chance at running the government in December.
Noboru Takeshita, the premier who forced the first sales tax
through parliament in 1988, and Ryutaro Hashimoto, who raised it
to 5 percent from 3 percent in 1997, were driven from office as
their public support collapsed - although other problems also
plagued both men. The decision to double the tax contributed to
fracturing the party of Abe's predecessor, Yoshihiko Noda.
Adviser Hamada, a 77-year-old emeritus professor at Yale
University and a key member of Abe's brain trust, told Reuters
on July 23 that Japan needed much more evidence of a sturdy
recovery before raising the tax.
The economy, which grew at an annualised rate of 4.1 percent
in the first quarter - the fastest among Group of Seven
industrial powers - needs to maintain similar growth for two
more quarters before enduring a tax hike, Hamada said.
BOND TRADERS WATCHING
He set the bar higher still, saying he is pushing Abe to
wait not only until growth picks up but until employment
improves, ensuring a firmer footing for the recovery.
It is unclear how much influence Hamada has on fiscal
policy, but the views of the reflationists might "have
significant influence on Abe's thinking on this subject," said
former Bank of Japan deputy governor Kazumasa Iwata, head of the
prominent think tank, the Japan Centre for Economic Research.
Some government officials are keen to start fiscal reform,
privately worried that changing the tax plan would endanger
Japan's promise to halve its budget deficit - excluding
debt-financing - from fiscal 2010 levels by fiscal 2015 and
balance the budget five years later.
They say raising the tax in incremental steps each year
could be too easily derailed, since the politically sensitive
hikes would have to be approved for five years in a row - with
national elections scheduled in three years.
Finance Minister Taro Aso has insisted on sticking to the
tax-hike plan, saying it was an international promise, but he
has suggested some fiscal spending could soften the blow.
BOJ Governor Haruhiko Kuroda said he did not think the
current plan "will do any great harm to the economy."
The Japanese government-bond market, which lets Abe's
government borrow 10-year money for less than 0.8 percent, would
be hit hard if Abe changes the sales-tax plan, said Tadashi
Matsukawa, head of Japan fixed income at PineBridge Investments.
"The whole of Abenomics would basically crash under that
scenario," he said, adding he thinks it unlikely Abe will change
Iwata, the former BOJ deputy governor, told Reuters that if
Abe postponed the agreed tax hike, that would endanger the rest
of the fiscal-reform schedule.
"If Japan can't raise the tax rate even when the economy is
in good shape, that may lead to market distrust over Abe's
governance," Iwata said.