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.

The ruling LDP, according to media reports, once proposed to reduce corporate tax from 33 percent to about 25 percent to expedite the "return of original capital" to business and achieve faster economic recovery. But the proposal was rejected because it would have increased Japan's fiscal burden.

In fact, for the past two decades, Japan has been using fiscal incentive policies to stimulate the economy, which has forced its total public debt to climb above 1,000 trillion yen, or 250 percent of its GDP. And since the annual interest expenditure makes up two-thirds of Japan's annual fiscal income, the appreciation of the yen by just 1 percentage point would force it to use all its fiscal revenue to pay its debt and its financial deficit will continue to expand.

Those opposed to the increase in consumption tax also say that employers should determine whether or not workers' salaries should be raised. No wonder, Japan's Chief Cabinet Secretary Yoshihide Suga has termed Abe's proposal "unprecedented".

Japanese enterprises face many operational difficulties. For example, in February Toyota Motor announced it would shut down its plant in Australia by the end of 2017. The reason: the company could not increase workers' salaries to the level demanded by the local labor union. As Akio Toyoda, Toyota president, said, Japan faces a series of issues like aging population and shrinking demand, so if the company keeps raising its workers' salaries as demanded by the Australian labor union, its factories will face collapse.

Moreover, economists say that the extent to which workers' salaries can be increased has to be determined by the real effects of Abe's economic policy. This is important especially for small and medium-sized enterprises because they have been suffering from limited capital and operational difficulties. In fact, given the problems the SMEs face, it is impossible for them to increase employees' wages.