Abe Makes Life a Lot Tougher for Bank of Japan

Gee, thanks, boss! 

Japanese Prime Minister Shinzo Abe just made life a lot harder for Haruhiko Kuroda or whoever succeeds him as Bank of Japan governor.

Whether Abe gives Kuroda a second term or not, the premier’s planned consumption tax hike fights the central bank’s efforts to rev up the economy and get inflation at least within shouting distance of the 2 percent target.

That’s a pity because while Japan’s economy isn’t in awesome shape, it is enjoying a relatively sunny patch. Hitting it with a tax increase — even if the proceeds will be spent on laudable things like child care and education — risks a damaging move backward, even a return to recession and outright deflation. 

It’s the opposite of the reflation that Abenomics and Kuroda were supposed to be about. Far better to delay the tax increase. It’s been delayed twice already, for good reasons. Or if Abe does press ahead, add caveats like staggering the introduction until inflation is more firmly on its way to target.

Why the cause for concern? After all, we are talking about an increase in the consumption tax of just 2 percentage points, to 10 percent from 8 percent. And it won’t take effect until 2019. 

It’s instructive to look at what happened in 2014, the last time the tax was raised. Official forecasts did predict some impact on the economy, but a pretty limited one. In the end, a nasty contraction ensued. Consumer spending and business investment were particularly hard hit. And prices once again got that sinking feeling. 

Source