Wednesday, October 02, 2013

Abe's political bet - He says yes to increase VAT tax!

Kantei October 1st, Abe's announcement. Photo Jlk

"I believe it is possible to quickly put Japan back on a growth path, because of this and to maintain trust in Japan and to hand to the next generation a sustainable social-security system, I have decided to raise the sales tax."

He did it. Why? Japan in the past played easy with the debt. Thanks to former bureaucrats decision to let bubble reminiscence go. That, combined with a rapidly ageing society in which a shrinking number of taxpayers are funding the welfare costs of a growing number of pensioners, has left Japan with one quadrillion yen in debt, twice the size of gross domestic product, nationally owned.

Now what does the SCMP has to say about it?

Q: What are the risks of the rise?

A: Firstly, there’s the danger that it will crush a fragile consumer recovery that has sprouted over recent months. That would badly derail Abe’s plans to fix the economy.

Secondly, there’s the risk all politicians face when they ask voters to pay more tax, and precedent is not in Abe’s favour.

Two months after then-prime minister Noboru Takeshita ushered in Japan’s first-ever sales tax – a modest 3.0 per cent – in April 1989, he was forced to resign amid plunging popular support and a separate corruption scandal. His successor then got a walloping in national elections.

Ryutaro Hashimoto quit as premier after his party lost landslide 1998 polls amid a public outcry over an increase in the tax to 5 per cent a year earlier, which was widely blamed for helping snuff out a fledgling economic recovery.

Abe is lucky in that his immediate predecessor, Yoshihiko Noda, did the legwork getting the law through parliament in a political suicide mission that played its part in him being booted from office last year.

Abe may just take Noda’s glory – but only if the Japanese economy survives the rise in the levy.

The economy will contract an annualised 4.5 percent in the three months after the sales tax is increased in April before returning to growth, according to the median calculation of economists surveyed by Bloomberg News. For the 2014 calendar year, the expansion is seen slowing to 1.6 percent from 1.9 percent this year, the median estimates show. Will Abe able to fulfill its commitment to 2 percent inflation by fiscal-year 2015? To handle Japan’s rising welfare costs and rein in its debt, the consumption tax rate should rise to at least 20 percent by 2020, according to Takatoshi Ito, the head of a panel advising Japan’s Government Pension Investment Fund, the world’s biggest pension fund.

But then, maybe Japanese, whose majority is less tolerant and in need of immediate requests compared to the past, could loose patience, endurance, resilience and just go wild, and do revolution...