Japan’s surprisingly weak third-quarter growth data means that raising the national sales tax again is “out of the question,” a close adviser to Prime Minister Shinzo Abe said Monday, adding that the government should compile a stimulus package worth Y3 trillion or more to support the economy.
The remarks made by Etsuro Honda in an interview with The Wall Street Journal followed the release of data showing that Japan’s economy unexpectedly shrank for a second straight quarter in the July-September quarter, slipping into a recession.
The annualized 1.6% rate of contraction in the third-quarter was “shocking” and “all too terrible,” said Mr. Honda, a Shizuoka University professor. “Any further tax increases are out of the question. It’s impossible.”
Mr. Honda, one of the main architects of Mr. Abe’s pro-growth measures, known as Abenomics, has been calling on the government to delay a planned increase in the consumption tax rate to 10% from 8% in October 2015 by a year and a half.
The world’s third-largest economy has weakened sharply since the government raised the sales tax rate to 8% from 5% on April 1, giving back most of the gains made by the initial success of Abenomics over 2013. Signs are growing that poor data has persuaded Mr. Abe to put off a further tax increase and instead push for emergency stimulus steps. Mr. Abe is expected to call a snap election to gain the mandate to press ahead with his economic plan.
“It is absolutely necessary to take countermeasures,” said Mr. Honda, who was a leading opponent to the tax change in past April. Mr. Honda said the government needs to put together a fiscal package made of the “three pillars” which include reducing the income tax, lowering social security premiums for the Japanese, and giving out cash handouts.
“Those three measures should amount to around Y3 trillion,” Mr. Honda said. That is what it takes to get Japan’s economy out of deflation by the autumn of 2016 and make it ready for a further sales tax hike in April 2017, he said as he referred to the time frame he has in mind. “But perhaps the amount needs to be larger, considering a significant drop” in growth over the summer, he said.
Mr. Honda didn’t elaborate on how large the income tax cut should be.
Until Monday’s data were out, Mr. Honda said he had thought that if the government was to pass new legislation to push back the timing of the sales tax raise to 2017, it probably shouldn’t include in the law any flexibility clause that would make it possible for the government in the future to further postpone the increase. That was because Japan needed to show global investors its commitment to reining in its debt binge over time. But “looking at today’s data, I am beginning to wonder whether it is ok to leave out a flexibility clause,” he said.
Turning to the Bank of Japan, which moved late last month to ramp up its already aggressive monetary stimulus measures, Mr. Honda said the central bank action came “too late, to put it bluntly.” The BOJ has fallen “behind the curve” in supporting growth from the hit from the tax increase, he added.
Further loosening monetary policy would “not be so easy,” considering that the central bank’s action on Oct. 31 was decided by a razor-thin 5-4 vote by its board, Mr. Honda said. Mr. Honda also suggested he first wants to examine the impact of the BOJ’s additional action over the coming half year, saying it generally takes time before monetary policy begins to show its full effects on the economy.
Still, “it would not be strange” if some call on the BOJ to ease further, Mr. Honda added.