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.
Kuroda didn’t speak out against the 2014 tax increase, and he hasn’t decried the latest push. It’s hard to know whether to interpret his discretion as assent. He’s a career civil servant, and it would be unrealistic to expect him to be too vocal. (Some observers even suspected that, as a former Ministry of Finance official, he was probably inclined to support the 2014 hike for reasons of fiscal rectitude.)
In hindsight, though, the damage from the 2014 hike was clear enough. Izumi Devalier, head of Japan Economics at Bank of America-Merrill Lynch, points us to a passage in the BOJ’s September 2016 Comprehensive Assessment of the economy.
In explaining why the 2 percent target hadn’t been met, the bank ticked off a couple of culprits: oil price declines, a slowdown in overseas markets and “the weakness in demand following the consumption tax hike in April 2014.” Ouch.
It looks like fiscal and monetary policy will again fight each other. It might be too late for Abe to retreat and again delay the tax move. Then again, if the campaign for the Oct. 22 election starts to sour for Abe, he’s probably not beyond a flip-flop. Tokyo Governor Yuriko Koike, his main challenger, wants to delay the tax increase.
Abe’s main game is to capitalize on a boost in his popularity after North Korea fired missiles over Japan, which diverted attention from scandals in the ruling party. If the tax has to be thrown overboard, I doubt he’ll regret it too much.
Kuroda might quietly applaud. As things stand now, the tax hike probably means interest rates will need to stay lower for longer. One board member is already looking ahead and arguing for more stimulus because of the tax, according to the BOJ’s Summary of Opinions.
For Japan as a whole, it might mean what Bank of America calls the “zombification of Abenomics,” with the economy just drifting along. That’s what Abenomics was once meant to avoid.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Philip Gray at [email protected]