Last time around, it proved pretty disastrous ..... so why is Japan's Abe intent on repeating the dose?

Thursday 31st March 2016

  

Last time around, it proved pretty disastrous ..... so why is Japan's Abe intent on repeating the dose?

ref :- "Abe's chance to scrap a self-defeating tax rise" , the Financial Times,  Editorial

The three-pronged stimulus package launched in 2012 by Japan's PM Shinzo Abe, known as the "Three Arrows" , in theory has quite a lot going for it beyond its catchy label. Something pretty dramatic was plainly required to kickstart an economy that in Yen terms had actually CONTRACTED between 1994 and 2012. An approach that combined reflation through monetary policy, fiscal stimulus and sustained structural reform made sense. Trouble is, if the thinking was right then the application has been too half-hearted to be effective.

Desperately needed structural reform was always going to be a long-term game, but progress so far has been patchy at best. As far as monetary policy is concerned, January's surprise move to negative rates followed a prolonged period since last summer which saw the Bank of Japan fail to act as economic data weakened. And on the fiscal side ? Welcome fiscal stimulus in 2013 became fiscal contraction in 2014 when consumption tax was raised from 5% to 8%, and the resultant weakening of demand pushed Japan into a recession from which it has never fully recovered.

Now the plan is for consumption tax to be raised once more, up to 10% next spring. Given the effects of the last tax rise, and the fact that Japan is still struggling, on the face of it such a plan seems ...... well, bonkers .

Not that in the wider scheme of things there aren't legitimate reasons to want to increase government revenue. High levels of public debt and deficits provoke genuine concern, and Japan's ageing population means that the bills for healthcare and pensions will only get bigger. These issues will indeed have to be tackled in robust fashion at some point in the future, but that should wait until the economy is in a position of strength. To do so now when the economy is weak would surely stifle demand still further and condemn Japan to a longer period of low growth and stagnant prices. And as the FT points out, even from a fiscal point of view a tax rise would be self-defeating. Reduced demand and zero inflation would put more pressure on the government to stimulate the economy through ..... you've guessed it, government spending. Now that's no way to bring down deficits.

Mr Abe has already postponed the tax hike once and now insists that it will be enforced next April, but it's difficult to know whether to take his statements as gospel. He is said to be readying a new fiscal stimulus package, has called for spending in this year's budget to be brought forward and has been consulting with Nobel laureate economists Stiglitz and Klugman who, on all known form, are very unlikely to be advising tax hikes at this difficult time. None of these are the actions a man intent on tackling deficits above anything else. There's a suspicion that he might use the occasion of hosting the G7 meeting in May this year to announce a postponement of the rise, which would be welcomed by the Japanese people, and take advantage of the new-found popularity to call for snap elections. That might be a bit sneaky for some tastes if it's true, but if it helps to get Japan back on the straight and narrow, who cares?