Some facts about Abe's move to raise Japan's sales tax

PUBLISHED : Tuesday, 01 October, 2013, 1:58pm
UPDATED : Thursday, 03 October, 2013, 4:47pm

Japanese Prime Minister Shinzo Abe announced a rise in the sales tax to 8 per cent in April from 5 per cent, in what is being seen as a key step on the road to reforming the economy.

Here are some key facts about the levy.

Q: Why does Japan need to increase the sales tax?

A: The economy grew furiously for decades until a stocks and property bubble burst around 1990. Successive governments launched round after round of pump-priming that did little other than increase debt.

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 an eye-watering one quadrillion yen (HK$79 trillion) in IOUs – twice the size of gross domestic product.

By comparison, the United States and Britain owe 109 per cent of their respective GDPs, Italy is in hock for 144 per cent and troubled Greece owes 184 per cent.

The difference is that Japan owes its money to forgiving domestic savers, who have not exacted the pound of flesh international creditors have demanded from the euro zone’s more troubled economies.

However, economists agree that it has to prevent this debt mountain growing, and putting up taxes is the only surefire way of doing that.

Q: How much extra money will the government get?

A: The government estimates the rise will generate an extra 8 trillion yen per year. However, it plans to use the lion’s share of this – 5 trillion yen – in the first year on stimulus, to try to mitigate the impact of the tax.

Plans include benefits for low-income earners and corporate incentives to boost investment. Abe is also expected to pledge an outright corporate tax cut.

Students of history say these figures are overly optimistic. They point to the previous sales tax hike in 1997, when Japan’s overall levy fell by more than 4 trillion yen as the ensuing economic slump slashed Tokyo’s revenues.

And, they say, even if the figures are accurate, the tax take will not be enough to shrink the debt pile; it will only reduce the speed at which it grows.

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.

Q: What will happen next?

A: A further rise to 10 per cent by 2015 is written into Noda’s hard-won legislation, although there are caveats. Some of Abe’s economic advisers are cautioning against any further rise, saying stopping deflation is a top priority.

Abe’s popularity and the modest successes he has had so far in reawakening Japan’s slumbering economy – it grew at an annualised rate of 3.8 per cent in the second quarter – have given him a little bit of insulation.

And proponents point out that even at the elevated rate, Japan’s shoppers will still pay a lot less than their European counterparts, who commonly fork out 20 per cent for value added tax.

However, knowing you pay less than someone else is scant consolation when you get to the supermarket checkout, and unless they see results, Japan’s voters could turn on Abe.