Japan leader gambles on sales tax hike

  • A shopper walks past a clothes shop in Tokyo on August 12, 2013

    A shopper walks past a clothes shop in Tokyo on August 12, 2013  (AFP/File)

  • Japan's Prime Minister Shinzo Abe speaks during a press conference at the prime minister's official residence in Tokyo on January 11, 2013

    Japan's Prime Minister Shinzo Abe speaks during a press conference at the prime minister's official residence in Tokyo on January 11, 2013  (AFP/File)

Japanese premier Shinzo Abe's long-awaited decision this week on whether to hike sales taxes is a major political gamble that proved career-ending for his predecessors, analysts say.

Since sweeping December elections on a ticket to kickstart the world's third-largest economy, the prime minister launched an unprecedented policy blitz -- dubbed Abenomics -- which appears to be taking hold as the economy expands while the stock market roars.

Abe underscored that early success with an upbeat speech to the New York Stock Exchange last week, calling for investors to get on board with his bid to regain Japan's one-time economic glory.

"Japan, as the third-largest economic powerhouse on the planet, will be back in full force again," he promised.

But his decision on hiking the tax levy, seen as crucial to chopping Japan's massive national debt, threatens not only to sink Abe's growth plans; it could also dim his popularity with voters.

Few, however, see the 59-year-old as having much choice, given the size of the country's national debt, proportionately the worst in the rich world at more than twice the size of the economy.

The International Monetary Fund, among others, have been calling on Tokyo to fix its books, after debt agencies cut their ratings on Japan's credit.

"This is Abe's biggest political decision since he took office," said Tomoaki Iwai, professor of politics at Tokyo's Nihon University.

"Japan is in the middle of an epic experiment and his decision is a crucial test of Abenomics."

Speculation has been building for weeks ahead of the announcement on Tuesday, which will come after the Bank of Japan publishes its Tankan business confidence survey.

Some expect the closely watched survey to hit a three-year high, possibly the tipping point that will give the premier the green light to implement a tax rise that was passed by the administration he booted out of office.

Abe has officially been undecided for months on whether to go through with raising the levy to 8.0 percent from the current 5.0 percent, expected to come into force in April. A further hike to 10 percent by 2015 is written into legislation, although there are caveats.

"Considering the level of Japan's national debt, I would say the sales tax hike is inevitable," said Yoko Takeda, chief economist with Mitsubishi Research Institute, who is among 60 prominent economists and business leaders invited to brief Abe on the pros and cons of a tax rise.

"If Japan failed to take action now, it would lose its trust with the world."

Economists estimate the impact of the consumption tax hike on households at some 8.0 trillion yen ($81 billion). Some worry that Japan's fragile consumer confidence will feel it is a hammer blow just as the economy shows signs of picking up.

In a bid to soften the impact, Abe is expected to unveil a one-time $50-billion stimulus package with benefits for low-income earners and corporate incentives to boost investment.

A cut to the corporate tax rate is also reportedly in Tokyo's sights, although the timeline for such a move remains unclear.

Despite securing his power base in July upper house elections -- putting off elections for at least three years -- historical precedents are not good for premiers who force consumers to shell out more.

Two months after then-prime minister Noboru Takeshita ushered in Japan's first-ever sales tax -- a modest 3.0 percent -- in April 1989, he was forced to resign amid plunging popular support due the levy and a corruption scandal. His successor was then defeated in national elections.

Ryutaro Hashimoto quit as premier after his party lost landslide 1998 elections amid a public outcry over the increase in sales taxes to 5.0 percent a year earlier.

The increase was widely blamed for helping snuff out a fledgling economic recovery.

Abe's immediate predecessor suffered at polls partly due to his Democratic Party of Japan passing the tax-rise bill.

But ultimately, Abe's biggest challenge may be convincing Japan's thrifty corporate sector to help with the battle against the country's long-running deflation by hiking employees' pay, seen as key to convincing them to open up their wallets and spend more.

The premier has called on Japan Inc. to do just that, but few seem to be biting.

"If Abe fails to persuade companies to raise wages, the risks of entering another deep phase of deflation will increase," said Yoshikiyo Shimamine, executive chief economist at Dai-ichi Life Research Institute.

"Japan's economy is approaching a critical stage."