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【#380】Tax Hike Delay and Fiscal Stimulus to Revive Abenomics

Hideo Tamura / 2016.06.09 (Thu)


June 6, 2016

     Japanese Prime Minister Shinzo Abe has postponed consumption tax hike until October 2019, while only a little more than two years are left for his Abenomics economic policy. If he fails to break away from deflation by September 2018, when his term as president of the ruling Liberal Democratic Party is to expire, the Abe administration may come to an end. In the worst case, Japan may plunge into political turmoil, with constitutional amendment proposals losing momentum.
     Prime Minister Abe himself may feel such a sense of danger more strongly than anyone else. He has become the first Japanese prime minister to send a notification to Ministry of Finance bureaucrats that they are “out of the team’s plan” (The Sankei Shimbun dated June 2), destroying a network of political, bureaucratic, private and press sectors formed by MOF bureaucrats to implement the tax hike.

Macroeconomic policy in full bloom
     Two decades of deflation since the second half of the 1990s has emerged from fiscal and monetary policy failures. The MOF has given top priority to fiscal consolidation through tax hikes and austerity, with successive administrations abiding by the MOF approach.
     The Abenomics policy advocated by the second Abe administration inaugurated in late 2012 has been put in shackles of tax hike by MOF bureaucrats. Bank of Japan Governor Haruhiko Kuroda, a former MOF bureaucrat, while taking a bold monetary easing policy in response to Abenomics, persuaded the prime minister that government bonds would suffer a free fall unless the consumption tax increase is implemented as planned. Falling, however, have been household consumption and the momentum of Abenomics.
     This time, Prime Minister Abe has silenced Kuroda. Following the tax hike postponement, he is making a great macroeconomic policy change. He is determined to combine a fiscal stimulus with monetary easing to kick into full gear.
     Abe has used last month’s Ise-Shima summit of Group of Seven top industrial countries. The summit declaration called for fiscal initiatives, noting that monetary easing alone would not suffice to address global economic risks. Western leaders are concerned about growing government debt and the risk of resurging inflation. They may be leaving Japan to test a fiscal stimulus, while seeing the result of the Japanese experiment. As a matter of course, countries should have their own fiscal policy according to their respective domestic conditions.

Can Abe pave the way for revitalizing Japan?
     Japan has a golden opportunity to combine fiscal and monetary policies. There is no inflation concern as deflationary pressures remain. While Japanese gross government debt is the largest among industrial countries, net debt offsetting government-owned assets is similar to the U.S. level. Net external credits for the public and private sectors total 340 trillion yen, about $3 trillion, the largest in the world. Negative interest rates are imposed on Japanese government bonds, meaning that the government can issue massive debt without increasing burdens on future generations.
     If the government invests in infrastructure development preparing for great earthquakes, human resources development and basic research for aerospace, biotechnology, information and communications, and other industrial sectors with great growth potential, companies will be encouraged to invest their cash reserves topping 400 trillion yen, about $3.6 trillion. A package of the tax hike postponement and smart fiscal spending programs will revive Abenomics, paving the way for Japan’s full revitalization.

Hideo Tamura is a columnist and a senior correspondent for the Sankei Shimbun newspaper.