Since becoming the Prime Minister of Japan, Shinzo Abe has implemented controversial steps to revive Japan’s economy. Tomorrow marks his riskiest move when he raises the consumption tax for the first time in 17 years. Starting this new fiscal year on April 1st, the consumption tax will rise from 5 percent to 8 percent. This could be problematic for Japan’s recovery.
One benefit from raising the consumption tax is that the increase should help Japan decrease its public debt, which is 240 percent of its GDP. With this increase, the Japanese government should receive an additional 4.5 trillion yen ($43.6 billion), or about 1 percent of its GDP, in the new fiscal year. However, the last three prime ministers that have raised the consumption tax did not last long after doing so. The most predominant prime minister to do so was Ryutaro Hashimoto, who raised the tax in 1997, which was the same year that the Asian financial crisis started.
With this history of raising the consumption tax in Japan, it will be interesting to see if Abenomics becomes “Abbegeddon”. One sign of decline is Japan’s industrial production fell 2.3 percent in February compared to the expected 0.3 percent gain. However, economists believe that this drop in manufacturing shows that companies are adjusting to an expected drop in demand. Another thing is that Japan’s GDP will expand at an annual rate of 4.4 percent in the first quarter, then contract 3.5 percent in the second quarter, but then should grow be growing again in the third quarter. More importantly, Japanese are healthier than they were in 1997 and unemployment is not on the rise, which differs from the beginning of the crisis.
Despite the good signs of unemployment and healthy companies, the raise in consumption tax could hurt the main goal of Abenomics. The goal of Abenomics is make sure the increase household wealth and spending power stays ahead of the increase to prices. Despite the health of Japanese companies, workers are receiving a small wage increase. It will be interesting to see if the consumption tax creates a blow to household spending power, which will reduce Japan’s overall consumption.