Japan to pledge 2019 tax hike to address debt mountain

Prime Minister Shinzo Abe sees raise – already delayed twice over fears it could derail the fragile economy – as essential to finance snowballing social security expenditure in the rapidly ageing society

PUBLISHED : Sunday, 14 October, 2018, 9:02pm
UPDATED : Sunday, 14 October, 2018, 10:21pm

Japan is expected to announce on Monday that it will raise the consumption tax to 10 per cent from the current 8 per cent in October 2019, in an effort to address its huge public debt.

The world’s third-largest economy has one of the highest debt-to-GDP ratios among rich nations. Much of it is held domestically at low interest rates, allowing Japan to avoid a Greek-style cash crunch.

Critics say that raising the tax from eight to 10 per cent is crucial to finance snowballing social security expenditure – especially medical fees – in the rapidly ageing society.

Prime Minister Shinzo Abe is expected to announce the sales tax hike at a cabinet meeting, apparently having judged that Japanese households can withstand it as the economy has been recovering.

The increase – originally planned for October 2015 – has been pushed back twice due to fears it could derail the fragile economy.

Tokyo’s last tax rise in April 2014 was blamed for pushing Japan into a brief recession.

This time, Abe is confident that with new government subsidies launched alongside, he can avoid the sharp drop in consumer spending that hit the economy after the 2014 hike.

Abe recently said that reforming the country’s social security system – pension and national health insurance, among others – was “the biggest challenge” ahead and pledged to tackle the issue.

Abe has seen the planned tax hike as increasingly necessary to improve the country’s social security system amid the rapid greying of Japanese society. Part of the expected revenue from the tax raise will go to expanding childcare support.

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The Cabinet meeting is also expected to approve a supplementary budget of around 940 billion yen (US$8.4 billion) to assist reconstruction in areas hit by heavy rains and earthquakes.

Abe has said the government will raise the consumption tax next autumn as scheduled unless significant economic turmoil occurs.

As past hikes dampened consumption, Abe will instruct ministries and agencies to take steps to prevent the economy from deteriorating by encouraging purchases of houses and cars through incentives such as tax breaks, government sources said.

To support small and medium-sized retailers, the government is considering the launch of a programme to reward consumers who make payments through cashless methods such as credit cards.

Japan raised the consumption tax from 3 per cent to 5 per cent in April 1997. The rate was hiked to the current 8 per cent in April 2014 under Abe’s administration.

Although the tax hike from 8 per cent to 10 per cent has been treated as the second stage of a two-stage consumption tax hike from 5 per cent to 10 per cent, Abe pushed back the schedule twice, first from October 2015 to April 2017, and then to October 2019.

While a consumption tax hike is always unpopular with voters in Japan, the International Monetary Fund has long asked Tokyo to raise the tax rate to secure sustainable revenues and improve its tattered finances.

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IMF chief Christine Lagarde warned this month that the challenges facing the country will “only grow as Japan’s population continues to age and shrink”, noting that both the size of the economy and the population were on track to shrink by a quarter over the next 40 years.

Restoring fiscal health is seen as urgent yet difficult, given that the rapid ageing of Japan’s population will mean swelling social security expenses such as medical costs and pensions.

As Abe decided to change the allocation of the revenue from the 2019 tax hike through an increased focus on childcare support, he delayed the target for attaining the country’s fiscal rehabilitation goal to fiscal year 2025 from fiscal year 2020.

A loss of confidence in Tokyo’s ability to pay its debts could send interest rates soaring and increase the risk of a bankruptcy.

Ratings agencies have previously cut Japan’s credit standing over its debt levels.

Agence France-Presse and Kyodo