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Abe takes pain to maintain consistency in his position on consumption tax hike

The biggest problem in Prime Minister Shinzo Abe’ decision to postpone the consumption tax increase is consistency with his previous statements. Kantei (Prime Minister’s Official Residence) had planned on deciding on the delay based on the G7 Ise-Shima Summit agreement, but there had also been miscalculations. We looked at the background of the decision process.

 

Abe cited the G7 Summit agreement as the reason for delaying the tax hike at a meeting of Liberal Democratic Party (LDP) Diet members on June 1. Yet, Kantei had been laying the groundwork for this since early this year.

 

The consumption tax increase to 8% in April 2014 resulted in an unexpectedly serious economic downturn. Domestic consumption has yet to recover to the pre-tax hike level. Since the beginning of 2016, there have been clear signs of economic slowdown in China, yen appreciation, and sagging stock prices. Abe had told senior LDP officials in private in mid-March that “it will be difficult for one single cabinet to raise taxes two times.”

 

However, Abe’s hands were tied by his own past statements. When he announced the previous postponement in November 2014, he stated at a news conference: “I affirm that there will be no further postponements.” Subsequently, he had stressed repeatedly that the tax increase would take place as scheduled barring a situation comparable to the Lehman Shock or a major earthquake.

 

Hard pressed to maintain consistency with Abe’s past statements, Kantei turned to the Ise-Shima Summit. The idea was to have the G7 agree on the need for fiscal measures in light of the risks faced by the world economy, and since Japan needs to fulfill its responsibility as the summit host, the consumption tax increase should be put off, in order not to hinder fiscal spending. Abe’s political secretary Takaya Imai, a Ministry of Economy, Trade and Industry (METI) bureaucrat, took the lead in this process.

 

On May 26, the first day of the G7 Summit, the world economy was discussed over a working lunch. Abe handed out a set of materials consisting of five A4 size sheets to the G7 leaders, in which he referred to the Lehman Shock of 2008 and noted that “growth of investment in the newly emerging economies is lower than the level during the Lehman Shock.” This document was meant to stress that the world economy is currently facing risks.

 

This report was prepared in secret by Imai and other senior METI officials. The Finance Ministry, which was kept out of the loop, resented this, complaining that “statistics were used selectively to give the impression of a Lehman-class crisis.” As a matter of fact, British Prime Minister David Cameron pointed out that “the situation is not like that.”

 

Kantei was forced to change tack.

 

At a news conference on May 31, Deputy Chief Cabinet Secretary Hiroshige Seko retracted his statement to reporters after the G7 Summit lunch that “the Prime Minister explained that the present situation is similar to that before the Lehman Shock” on grounds that this “did not adequately convey what he meant to say.”

 

When Abe announced the tax hike postponement at his news conference on June 1, he was forced to admit that, “There is no denying that a situation comparable to the Lehman Shock or a major earthquake has not occurred.” He said: “I take to heart the criticism that I went back on my pledge.” (Abridged)

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