Written by Jonathan Wang
Once one of the great economic superpowers in the world, Japan has recently fallen into a recession. This comes after Prime Minister Shinzo Abe had tried to bring the country out of a two decade-long deflation period; two years ago, he came to power promising to kick-start the economy and end Japan’s long streak of wage and consumer price-declines.
“Abenomics” was concentrated in stimulus measures, mostly involving an expanded program of asset purchases by the central bank. However, he is now considering dissolving the Japanese Parliament and holding new elections. The rising sales tax has been largely to blame for the recession by curbing consumer spending, but polling has shown that voters will work together with Prime Minister Abe in enhancing the government tax program.
The current tax plan was proposed to curb Japan’s colossal government debt, which, at two and a half year’s national economic output, is the largest in the developed world. However, there are concerns that consumer confidence will not be able to handle the increase in taxes after years of slowing wage growth. The risk to the plan is, instead of fighting off the debt crisis, higher taxes could instead push the country further into recession.
“Raising the consumption tax is supposed to generate government revenues, but if we fall back into deflation it will all be for nothing,” Prime Minister Abe said at a meeting in Brisbane, Australia, on Sunday.
Although the second tax increase does not go into effect until October 2015, the Prime Minister must already begin to decide what he wants to do: go through with the plan, cancel it, or postpone it. If he decides to enact the program, taxes on all goods and services would increase to 10 percent over 18 months. The first part of the tax plan raised the rate to 8 percent in April 2014.
The consumption-tax increase debate has even reached its way over to the United States; last week, Secretary of the Treasury, Jacob Lew, implored European and Japanese governments to do more to stimulate their economies. A weakened overseas economy will most certainly affect American financial growth in a very critical time.
Many of P.M. Abe’s critics are asking for loosened business regulations as an alternate solution to Japan’s economic problems with more lasting benefits for the country. Political commentators have also attributed the tax problem as a convenient platform for Prime Minister Abe to seek re-election while he has the political advantage on his side; his opposition is weak and he remains relatively popular, with approval ratings hovering around 50 percent.
Raising the consumption tax to 10 percent may not effectively mitigate the economic deflation in Japan. Consumer confidence and spending have been extremely low due to the rising sales tax, and Prime Minister Abe runs the risk of moving even further into debt and deflation. Many argue that fiscal legislation cannot bring the country out of its long-term rut, especially through increases in taxes.
Notably, the Bank of Japan holds 20% of outstanding Japanese government bonds and is buying more each year than the government can even issue, even though interest rates and inflation are as low as ever. With that in mind, it seems possible that Japan is moving closer and closer to a world in which its government will be able to monetize its massive debt with no inflationary consequences, perhaps a way out of this economic recession.