On November 18, Prime Minister Shinzo Abe called a snap election. He will dissolve the House of Representatives, the lower house of the National Diet, on November 21, and hold the election on December 14.
At the same time, he pledged that he would postpone the consumption tax hike from 8 to 10 percent scheduled in October 2015 to April 2017. (his speech was broadcast on TV and the link is here, although it’s in Japanese).
As the quarterly estimate of Japan’s GDP for July to September shows, the real growth rate is shrinking by an annualized rate of 1.6%. This is the second consecutive contraction, which means Japan is technically in recession.
The opposition parties and the media are now blaming Abenomics as the cause of recession, so he has to defend it vehemently. Yet in fact employment figures are better than ever, with lower unemployment rate and higher ratio of jobs to job seekers.
After he defended the record of Abenomics, the prime minister blamed the tax hike implemented on April for dampening consumption expenditure, and threatening Japan’s chance of getting out of deflation, the primary goal of Abenomics.
Nominal wages have been increasing, but real wages have been falling due to the rise of consumption tax: 3 percent increase in taxes pushes up prices by about 2 percent.
The Consumption Tax Law of 2012 has an article 18 in its appendix. According to this so-called economic conditions article, the government is obliged to implement policies to maintain the nominal growth rate of 3 percent and the real growth rate of 2 percent on average from fiscal year 2011 to 2020. Invoking the article, the prime minister decided to postpone the next increase in consumption tax scheduled on October 2015 to April 2017.
But in the same speech, Mr. Abe also stressed that when the tax increase is eventually implemented in 2017, the economic conditions article would not be invoked again. That essentially means article 18 would be removed when, per the requirement of the legislative procedure, a new law to delay the tax hike is submitted. This was intended to show the government’s commitment to fiscal consolidation to the investors.
But why couldn’t Mr. Abe postpone the next consumption tax hike without going to a general election? Especially when the LDP and its coalition partner, New Komeito Pary, have a comfortable majority in both Upper and Lower Houses of the Diet? Here comes the intricate aspect of Japanese politics.
The current schedule of consumption tax hike was decided in the Summer of 2012 by three parties: the then governing Democratic Party of Japan (DPJ), the LDP, and the New Komeito Party. The DPJ decided to raise the tax even though it was not part of its policy manifesto for the 2009 election, and suffered a devastating defeat in the last general election in December 2012.
Abe was not happy with this deal to begin with. When he ran for and won the LDP leadership election, it was upsetting for the party establishment since Abe was reluctant to keep the three party consensus.
In the last election of 2012, the LDP pledged to keep the promise of raising consumption tax, and there are many politicians in LDP who believe that the party should stick to it. Surrounded by fiscal hawks in the LDP, the prime minister is an exception in worrying about the economic consequences of the tax increase.
He does not have full backing of his own party members on the issue of delaying the consumption tax hike. This is partly the reason why he decided to go ahead with the hike last October. He has to resort to election to win his own party’s backing.
There is also a rather shrewd political calculation: the opposition parties are unprepared for an election. The DPJ, the largest opposition party, has not yet decided half of its electoral candidates. Most of the other smaller parties may not survive the next election, thanks to Japan’s electoral system which favors bigger parties.
Furthermore, the oppositions have not yet come up with a better alternative to Abenomics. As a party comprised of diverse political and economic views, the DPJ has no coherent economic policy package to match Abenomics.
Certainly Abe has averted another disaster of raising the consumption tax for the time being, but there are two worrying aspects about this deal.
First, the prime minister is facing a general election when the economy is in recession. This is not an easy battle even with ill-prepared opposition parties. As much as he wishes to distance himself from the consumption tax hike, the hike took place during his term anyways and is therefore easily seen as his mistake. If he fails to convince the public that Abenomics is working, it would be the end of Abenomics.
Secondly, by pledging to remove the economic conditions article from the original law, he has committed to the future tax increase from 8 to 10 percent in April 2017, no matter what. In a follow-up interview, he somehow modified what this might mean, saying he would postpone the consumption tax hike if a crisis in the magnitude of Lehman Shock-type global financial crisis happens.
But committing to a future tax increase now is not the best economic policy: he should have kept the economic conditions article, or should have strengthened his commitment to reflationary policy. For example, the government and the BOJ could agree on targeting the nominal growth rate of three to four percent.
If he wins, Abe will buy about two and half years of time to pursue Abenomics, but would it be enough? The future of Abenomics and Japan is still up in the air.