TOKYO — Japan is on a roll. Its economy is growing at a robust rate of 3.8 percent, thanks to the bold monetary and economic policies of Prime Minister Shinzo Abe. Japanese stocks are up 40 percent this year, and the country is on the cusp of overcoming 15 years of deflation. To boot, Tokyo has just won in its bid to hold the 2020 Summer Olympics, raising hopes of an investment and construction boom.
But some economists worry that a plan to raise taxes is coming at the worst possible moment — and could demolish the foundations of a recovery.
“It’s nonsense. Japan is only midway to recovery and hasn’t fully escaped deflation,” said Goushi Kataoka, chief economist at Mitsubishi UFJ Research Consulting, which is affiliated with Japan’s largest bank, Mitsubishi UFJ Financial Group.
“Just as we are beginning to see the light, we’re threatening to snuff it out,” Mr. Kataoka added. “We’re trying to roast the pig before it’s fat enough to eat.”
After weeks of debate, Mr. Abe appears set to go ahead with a plan to raise the sales tax rate in April to 8 percent from 5 percent — part of his bid to rein in the country’s public debt, which has surged to more than twice the size of the economy.
Opponents say raising taxes on spending is premature, especially because it could dampen consumer spending, considered the weakest link in Japan’s nascent recovery. If spending slumps, Japan could slide back into the deflationary morass that has dogged it during the past 15 years, putting the brakes on some of the most promising growth this year among the world’s developed economies.
Still, proponents of raising the tax are pushing for action now because they fear a return to the dysfunction that has marred Japanese politics over the last several years, with a revolving door of prime ministers, said Noah Smith, an assistant professor of finance at Stony Brook University in New York.
Mr. Abe, with solid support, could be the last prime minister in a while to be able to push through unpopular overhauls, he said.
“The optimal policy is to wait to raise the consumption tax, maybe a year. But given Japan’s political dysfunction, many people are afraid that if you wait too long, that will never get done,” Mr. Smith said. “The idea is that if we see a chance to make unpopular structural reforms, we need to take it now, even though it’s not the optimal time.”
To soften the blow, the Japanese government is considering putting together a stimulus package of as much as ¥5 trillion, or about $50 billion, a sum that would return the equivalent of two percentage points of the tax rate increase to consumers and companies, local news reports have said — though Mr. Abe has said he will not a make an official decision on the matter until early October. Japan’s business lobby has also called on the government to cut the country’s relatively high corporate tax rates to make up for a decline in consumption.
Speaking at a government panel on economic and fiscal policy on Friday, Mr. Abe suggested that Japan’s recovery was robust and that its economy was already escaping deflation. He also said that both government and private sector spending before the 2020 Tokyo Games would further bolster economic recovery.
The Games “will be a catalyst that will clear away 15 years of deflation and shrinking,” he told the panel. He stressed that he had made no decision on a tax increase yet.
Backers of a higher sales tax, including Japan’s powerful Finance Ministry, say the move is necessary to rein in the country’s public debt, which by all measures is gargantuan, thanks in large part to the costs of caring for Japan’s swelling ranks of the elderly. This year, national debt topped ¥1 quadrillion for the first time — more than twice the size of Japan’s economy and larger than the economies of Britain, France and Germany combined.
Article source: http://www.nytimes.com/2013/09/16/business/global/as-japan-recovers-fears-that-tax-increase-could-halt-progress.html?partner=rss&emc=rss