Japan PM calls snap election for next month, puts off sales tax increase

November 16, 2014: Australian Prime Minister Tony Abbott, left, and Japanese Prime Minister Shinzo Abe, right, talk as they wait for U.S. President Barack Obama to arrive to start their meeting at the G-20 Summit in Brisbane, Australia. (AP Photo/Ian Waldie,Pool)

Japan's Prime Minister Shinzo Abe called a snap election for December and put off a sales tax hike planned for next year until 2017 as the country struggles to fend off recession.

Abe said Tuesday that he decided to postpone a second tax hike after Japan, the world's third-largest economy, slumped into recession due to a tax increase in April. Abe said he will dissolve parliament on Friday. The election is scheduled for mid-December.

Delaying the tax hike will slow Japan's work on repairing its tattered public finances. But Abe said the risk to the economy was a bigger threat.

Fresh elections may seem a puzzling decision given the bad news on the economy. But the Liberal Democrats have a solid majority and hope to further consolidate their power at a time when opposition parties are weak and in disarray.

The general election will seek a renewed public mandate for Abe's all-or-nothing bid to revive Japan's economy, which has suffered from deflation and stagnation for two decades. After taking office two years ago, Abe declared "Japan is Back" and vowed to restore his country's fading economic might.

Japan needs more tax hikes to get its swollen government debt under control, but the April tax increase, to 8 percent from 5 percent, crushed consumer and business spending.

As early as last week, the Liberal Democrats were coaching freshman lawmakers on campaign strategies and opposition parties rushed to discuss possible new alliances. Pre-election debates by party leaders are in the works, and new campaign posters have gone up in Tokyo neighborhoods.

Abe got a rare second term as prime minister, having stepped down just a year into his rocky first term in office in 2006-2007. His support ratings started out high, as share prices surged in early 2013. But they have fallen recently. Parliament got bogged down in squabbles over campaign finance scandals that led to resignations of two of his cabinet ministers within weeks of an early September reshuffle.

By dissolving parliament for an election Abe can clear the slate and once again reshuffle his cabinet, said Michael Cucek, a Tokyo-based analyst and fellow at Temple University Japan. He described the sales tax hike and Abe's policy of lavish fiscal and monetary easing as "mutually contradictory economic programs."

The decision to push ahead with April's increase in the sales tax, has been judged a miscalculation by some of Abe's advisers, including Koichi Hamada, a former Yale University economics professor who helped draft Abe's policies.

"It looks like the Japanese economy was hit by some body blow," said Hamada.

Last year, Hamada lobbied for a more gradual increase in the tax rate. But he shrugs off suggestions by opposition politicians and other critics that the backsliding of the economy represents a "failure" of Abenomics.

A recent central bank decision to expand monetary easing is helping, he said. "The level of the consumption tax is not so high, but the increase was rather drastic. It really counteracted Abenomics."

So far, despite windfall profit gains from a weakening in the Japanese yen and stronger share prices, Japanese corporations have not delivered the sorts of wage increases needed to help households keep up with rising costs for food, utilities and other necessities.

Apart from putting off the next sales tax hike, to 10 percent, Abe reportedly plans to announce tens of billions of dollars in new stimulus that would be focused mainly on help for struggling households and businesses.

Abe is gambling that in the election, likely to be held Dec. 14, the public will reward those moves, despite the recent performance of the economy.

"Analysts feel Abe will want a fresh slate and renewed energy to reach his economic goals," said Stan Shamu, a market strategist at IG. "On the other hand, calling an election now could see his majority slip significantly."

Abe is also betting the decision will not undermine confidence in Japan's ability to finance its public debt, which is more than twice the size of the economy.

Eventually, Japan must boost taxes to cover rising costs for health and elder care in this aging society.

"The Japanese government is doing a kind of Ponzi game," Hamada said. "Usually a Ponzi scheme doesn't work in the private economy, but the government always has the next generation of taxpayers to rely on," he said.