Japanese Prime Minister Shinzo Abe told lawmakers on Wednesday that he has decided to delay a scheduled sales tax hike by two-and-a-half years, putting his plans for fiscal reforms on the back burner amid more weakness in the economy.
The widely-anticipated delay will be welcomed by a majority of voters, who will cast ballots in an upper house election in July. But it is fanning doubts about Abe’s plans to curb Japan’s huge public debt and fund ballooning social welfare costs of a fast-ageing population.
“I want to fullfill my responsibility by accelerating Abenomics more and more,” Abe told a gathering of his ruling Liberal Democratic Party (LDP) on Wednesday. “I have decided to delay the sales tax hike to 10 percent by two and half years.”
It would be the second time that Abe has delayed the increase in the sales tax to 10 percent from 8 percent, after a rise from 5 percent in April 2014 tipped the economy back into recession. Abe took office in December 2012 pledging to beat deflation and reboot the moribund economy with his “Abenomics” revival recipe, but has made little headway amid stubbornly weak domestic and export demand.
“From an economic standpoint, the market is likely to view the delay as a positive surprise for domestic demand,” said Lee Jin Yang, macro research analyst for Aberdeen Asset Management in Singapore.
Abe, whose term as LDP president and hence, premier, ends in September 2018 unless the LDP changes its rules, had repeatedly said he would implement the tax rise as planned unless the economy faced a shock from a financial crisis or natural disaster.
But he laid the groundwork for a delay at last week’s Group of Seven summit, insisting his G7 partners shared a “strong sense of crisis” about the global economic outlook and drawing parallels to the 2008 world financial crisis that followed the bankruptcy of Lehman Brothers.
Many economists said Abe’s comparisons to the Lehman Brothers failure were far-fetched, but there is consensus that Japan’s economic data has been disappointingly weak.
Corporate profits, which Abe had been counting on to fuel gains in wages, fell at the fastest pace in more than four years in January-March, which could encourage companies to cut back on future capital expenditure plans.
Revised data confirmed on Wednesday that manufacturing activity in May contracted by the most in more than three years as new orders slumped.
Government officials have said Abe has not abandoned a pledge to bring the country’s primary budget balance into the black by the fiscal year from April 2020 to rein in public debt which is already more than double annual economic output.
But that target had already looked elusive, even with the government’s rosy forecast of real economic growth of 2 percent on average in coming years.
“I have very strong concern about fiscal discipline,” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.
“We are stepping onto a potentially dangerous path because once you start this policy it is difficult to stop, and once you do, the economy will tank.”
Some economists now worry that Abe is leading the country toward a sovereign ratings downgrade, which would push up borrowing costs for Japanese companies.
Bank of Japan Governor Haruhiko Kuroda said it was important the government keep its pledge to achieve a primary budget surplus by fiscal 2020, the Hokkaido Shimbun reported.
Abe will also need to explain to voters how he plans to make up for the funding gap from the tax hike delay to October 2019, and keep pledges to beef up support for the elderly.
The premier will likely bow to pressure from his coalition partner not to call a snap general election.
Speculation had simmered that Abe would call an election for parliament’s powerful lower house as he did in 2014 after announcing the first tax hike delay, aiming to lock in his ruling bloc’s two-thirds “super majority” in the lower house and win a similar grip on the upper chamber.
No lower house poll need be held until 2018.