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Editorial: Sales tax hike delay raises questions about Japan's future

Prime Minister Shinzo Abe used bizarre logic to justify his decision to postpone raising the consumption tax from the current 8 percent to 10 percent, scheduled for April 2017, by 2 1/2 years.

Abe officially announced the decision at a news conference at his office on the evening of June 1. As for the reasons for his decision, the prime minister explained that Japan needs to "prepare for a new crisis involving the world economy," and he will seek the public's response to his decision through the summer House of Councillors election.

However, his explanation raised numerous questions as to why he once again chose to postpone the sales tax increase to 10 percent, which had originally been scheduled for October 2015.

When he announced in November 2014 that he would postpone the tax increase from October 2015 to April 2017, Prime Minister Abe pledged not to delay the hike any further and dissolved the House of Representatives for a snap general election. At the same time, he suggested that he could further delay the tax raise if Japan were to be hit by a major crisis, such as one similar to the economic crisis triggered by the collapse of Lehman Brothers in 2008 or the March 2011 Great East Japan Earthquake and tsunami.

The prime minister distributed briefing materials to Group of Seven (G-7) leaders at the Ise-Shima Summit on May 26-27, pointing out that the world economic situation is similar to that at the time of the 2008 economic crisis, and emphasized that the world economy faces a fresh crisis. The move was aimed apparently at justifying the postponement of the tax increase again by comparing the world economic situation to that at the time of the 2008 crisis.

At the June 1 news conference, however, the prime minister said a crisis similar to that following the collapse of Lehman Brothers has not occurred. He apparently kept in mind that foreign news media criticized Abe's comparison of current world economic conditions to those following the collapse of Lehman Brothers at the G-7 summit as "unconvincing."

However, Prime Minister Abe said Japan must fulfill its responsibility for averting an international economic crisis as the chair of the 2016 G-7 summit. "We agreed at the summit to take all possible policy measures to avert a fresh crisis in the world economy," he told the news conference.

However, the G-7 leaders did not share the view at the Ise-Shima Summit that there is a high risk of the world economy plunging into a crisis and that Japan should take fiscal measures to prevent such a crisis.

With regard to the domestic economic situation, the prime minister cited employment, income and other economic indexes to emphasize that "Abenomics," the economic policy mix promoted by his government, has steadily made achievements. He did not acknowledge that he decided to delay the tax increase due to factors involving the domestic economy.

In short, Abe says that the world economy does not face a crisis like that following the failure of Lehman Brothers and that Abenomics is producing its intended results. However, he is set to postpone the sales tax hike as a precaution against a possible new crisis. Such logic is bizarre.

Abe's responsibility for failing to keep his promise to create an economic environment in which the consumption tax can be increased is serious. Nevertheless, Prime Minister Abe asserted that the postponement of the tax hike is "a new judgment different from my promise," and said he will ask voters if they support his decision through the upcoming upper house race. He appears to believe that if the ruling coalition is to win half of the seats up for grabs, he would evade responsibility for failing to keep his earlier election campaign pledge.

The prime minister pointed out that a consumption tax hike could adversely affect economic conditions and prevent Japan from overcoming its prolonged deflation. True, consumer spending decreased after the rate of the indirect tax levied on virtually all goods and services was increased from 5 percent to 8 percent in 2014. If the sales tax hike to 10 percent is postponed once again, it will likely have the effect of temporarily propping up the economy.

However, although the consumption tax increase to 10 percent was postponed by 1 1/2 years from October 2015, Japan's economy has not been put on track to a steady recovery. There is no guarantee, either, that the postponement of the tax hike again will bolster Japan's economy.

Far from it, the decision will fuel concerns about the future of Japan's social security system and the economy because Japan will lose financial resources for improving social security services following the postponement of the tax hike.

When the sales tax is raised to 10 percent, a total of 2.8 trillion yen will be set aside for the expansion of social security services. Since 1.35 trillion yen is allocated for measures to improve social security services while the tax rate is 8 percent, the postponement of the tax raise will cause a shortfall amounting to some 1.45 trillion yen.

Cash handouts to low-income earners and other measures can be implemented only after the consumption tax is raised to 10 percent.

The government had intended to secure 700 billion yen through the consumption tax hike and 400 billion yen through other measures to fund efforts to support childrearing. However, only 600 billion yen can be secured for such measures through revenue from the consumption tax as long as the rate remains at 8 percent. Since there is a serious shortage of day care and nursing care workers, it is an urgent task to improve wages for these workers.

The government has drawn up a plan on "the dynamic engagement of all citizens." Under the plan, the government aims to raise the "desired" birthrate -- a birthrate that can be achieved if all those who want to marry and have children can do so -- to 1.8. Moreover, the government is trying to reduce the number of those forced to quit their jobs to care for their sick or elderly family members to zero. To that end, the plan calls for improvements in salaries for day care and nursing care workers. These measures will require some 200 billion yen in stable financial resources annually.

The prime minister emphasized that the government will prioritize support for nursing care and childrearing even though the tax increase has been delayed. However, it would be uncertain how far measures to support nursing care and childrearing can be implemented if the government were to rely on an increase in tax revenue that largely depends on economic conditions.

The prime minister explained that the government will stick to its goal of achieving a primary balance surplus by fiscal 2020 in order to ensure fiscal health, but it is highly doubtful that this goal can be achieved. Abe's term as president of the ruling Liberal Democratic Party expires in September 2018. It remains to be seen who will be responsible for the tax increase rescheduled for October 2019. It is hard to believe that the consumption tax raise, which has been postponed twice, can be implemented easily.

Serious questions remain about large-scale economic stimulus measures that the government intends to implement. The government's debts would further snowball if it is to resort to a handout policy in a bid to win support for ruling coalition candidates in the upcoming upper house election despite fiscal difficulties resulting from the postponement of the tax increase.

Under the integrated reform of the tax and social security system, revenue from the consumption tax will be used to secure financial resources for snowballing social security costs amid the aging of the population and declining birthrate so that all generations can equally and broadly share the burden. A system aimed at preventing debts from being passed on to future generations must not collapse.

The main opposition parties are opposed to raising the consumption tax in spring next year as earlier scheduled. The largest opposition Democratic Party is demanding that the government issue deficit-covering bonds to help make up for a shortage of financial resources for social security programs. However, the party should clearly show specific financial resources that do not rely on new borrowing.

The key point of contention in the upcoming upper house election is not just the pros and cons of postponing the consumption tax increase but sustainable tax and social security systems for the future of Japan. The ruling and opposition parties should compete in the election campaign by showing responsible visions for future tax and social security systems.

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