April could be 'cruelest month' for Abe

The Bank of Japan may have painted a bullish economic picture for Japan, but most economists say the increase in consumption tax from April 1 could drag down the country's economic growth, and lead to high inflation and shrinking domestic consumption.

The Japanese government has raised the consumption tax from 5 to 8 percent, which means consumers have to pay an additional 300 yen ($2.9) for every 10,000 yen they spend. This could lower consumer spending and, eventually, lead to economic contraction, which could result in loss of public support for the government and political stability. In April 1997, an increase in consumption tax led to the resignation of the then prime minister Ryutaro Hashimoto. April, therefore, could be the "cruelest month" for Japanese Prime Minister Shinzo Abe.

The Japanese government has envisaged that the tax increase will be counterbalanced with an increase in people's salaries, which will boost demand and investment. But can the Japanese economy withstand the pressure of declining consumption by raising the prices of goods and achieve economic growth? The truth is that Japan's political parties, other than Abe's Liberal Democratic Party, and many economists feel that enterprises do not have the capacity to raise employees' salaries to the extent expected by the government.