TOKYO—Japanese Prime Minister Shinzo Abe has postponed a controversial sales tax increase and called an early election in a bid to salvage his Abenomics policies after Japan fell into an unexpected recession.
Abe delayed for 18 months a second planned sales-tax increase after the first installment in April led consumer spending to stagnate and the economy to contract for two straight quarters. The second increase, which will lift the tax rate to 10 percent, will now go into effect April 2017. It was originally slated to kick into effect in October of next year.
Although some luxury goods executives have downplayed the impact of the April’s tax increase, it is clear that Japanese retailers are feeling the effects of higher price tags for consumers. Earlier this month, Isetan Mitsukoshi, the country’s largest department store operator, said its first half sales slid on a fall in consumer spending. The retailer’s sales for the six months ended Sept. 30 slipped 3.5 percent to 581.62 billion yen, or $5.65 billion.
On Tuesday, Isetan Mitsukoshi president and chief executive Hiroshi Onishi said he believes the tax increase is necessary to improve Japan’s fiscal standing and social security system but at the same time he pleased with news of the delay.
“Considering the impact on consumption, it is a good thing to move the tax increase to April. As a retailer, we need to come up with ways to motivate consumers,” Onishi said. “I’m hoping that there won’t be a political vacuum and the government will quickly come up with a new strategy for a stronger economy.”
Eiji Kaneda, Operating Officer for Corporate Planning at specialty retailer Beams, voiced a similar view.
“The postponement comes as good news for retailers, as [the increase] would have further discouraged consumer moods. [The] tax increase should wait until the economy picks back up,” he said.
The announcement of the tax postponement and election came after preliminary data Monday showed the world’s third-biggest economy contracted 1.6 percent in the third quarter, coming in far below market expectations. After viewing those numbers, economists said a tax hike postponement was all practically a done deal.
Japan’s third-quarter private consumption rose just 0.4 percent from the previous quarter. That is coming off a very low base as consumption slumped 5 percent in the second quarter in the immediate wake of the first tax hike.
In a note released Monday, Tomo Kinoshita, an economist at Nomura, said the take hike postponement should bode well for the country’s economic health.
“The delay in the consumption tax hike should combine with recent yen weakness to boost the recovery trend for the economy,” Kinoshita said.
Parliament will be dissolved on Nov. 21, Abe said at a press conference in Tokyo, less than two years into his four-year term.
He didn’t give an election date but probably pick Dec. 14 for the election, according to people with knowledge of the ruling party’s strategy.
Abe argued that the recession didn’t mean Abenomics — his policy of unprecedented monetary easing, stimulus spending and structural reform — was a failure.
“I thought we should test the will of the people,” Abe said. “If the LDP-Komeito coalition doesn’t keep its majority, we cannot push forward the three arrows and Abenomics. If we don’t get a majority, it would be a rejection of Abenomics, and I would resign.”
Abe, whose ruling Liberal Democratic Party holds more than 60 percent of seats in the more powerful lower house of parliament, is gambling that a divided opposition will permit the LDP to retain its hold on the legislature. That could allow him to stay in office until 2018 and accelerate his economic program to end two decades of deflation and spur growth. Should he lose too many seats, he could face a challenge in a party leadership election next September.
“The opposition will have the potential for negative campaigning, helped significantly by the recession,” said Jun Okumura, visiting scholar at the Meiji Institute for Global Affairs in Tokyo. “The lack of a sense that the opposition has a positive message, together with what will probably be a low turnout means the LDP-Komeito coalition won’t see significant attrition from the seats they have now.”
A poll carried out by broadcaster NTV from Nov. 14-16 found 39 percent of respondents supported the LDP, compared with 9.7 percent for the next most popular option, the Democratic Party of Japan.
Abe’s policies, supported by handpicked Bank of Japan Governor Haruhiko Kuroda who delivered the monetary easing, led to a plunge in the yen that fueled exports and a surge in corporate earnings. Since mid-November 2012 the benchmark Topix stock index has jumped 93 percent, the biggest advance in developed markets.
Those gains aren’t trickling down to the general public and voters who have endured higher prices and 15 months of declines in real wages are souring on Abe.
Growth initially accelerated before the first phase of the tax increase to 8 percent from 5 percent in April choked consumer spending and led the economy to contract 7.3 percent in the second-quarter, the biggest slide since the first three months of 2009.
Abe had inherited the plan for the sales tax increase from the previous government. By delaying the scheduled increase and going to the polls, Abe is staring down the fiscal hawks in his own party who continue to back the tax as a way to lower the world’s biggest debt. Sadakazu Tanigaki, a former LDP leader who agreed on the two-stage tax-hike in 2012 with then Prime Minister Yoshihiko Noda, said in September that the levy should be raised as planned.
The yen fell to a seven year low against the dollar this week on speculation Abe would delay the tax increase. Bond markets showed little reaction today to the announcement, with the yield on Japan’s 10-year debt rising 2 basis points to 0.51 percent.
Fitch Ratings Ltd. views the postponement of the austerity measure as a “significant development” for the nation’s credit rating, Andrew Colquhoun, the company’s head of Asia-Pacific sovereigns, said in an e-mailed statement Tuesday.
“There is no backing away from our commitment to fiscal consolidation,” Abe said today. “We will keep our fiscal 2020 goal to achieve fiscal health. I am convinced that through that, there will be no loss of international trust.”