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ECONOMY > Economic Policy

Obstacles are removed to raising consumption tax as law on free preschool education is enacted

A program to make preschool education and nursery free, which will be financed by the scheduled consumption tax hike in October, has been decided. Preparations are also underway to introduce measures worth about 2 trillion yen, which include subsides to home and car purchases and awarding monetary points on purchases made through cashless transactions, to lessen the impact of the tax increase. The option of deferring the tax increase is still left in case an economic crisis on the scale of the Lehman shock crisis occurs, but a senior official with the Ministry of Finance argues that the “disadvantages of putting off the tax increase outweigh the advantages.”

 

MOF is most sensitive about the economy. Prime Minister Shinzo Abe has noted that the tax hike will be postponed if something on par with the Lehman shock happens. There are concerns that overseas economies may slide into a downward spiral due to U.S.-China trade tensions, the U.K. exit from the European Union, and other developments. The unpredictability of the global economy is growing stronger and is beginning to cast a shadow on the Japanese economy.

 

After next week, economic indicators are due to be released in succession. The diffusion index, which the Cabinet Office will announce on May 13, is forecast to “worsen.” In preliminary estimates for real gross domestic product (GDP) in the January-March period, which will come up on May 20, personal spending is forecast to turn negative and not to be able to prop up weak exports.

 

The dominant view in MOF is that the ‘worsening of economic indicators is already factored in,” but there is concern that the release of GDP figures for the April-June quarter may highlight a further economic slowdown. If the consumption tax is raised as scheduled, the government may compile an extra budget in the autumn Diet session to introduce an additional economic stimulus.

 

MOF holds the view that though the introduction of economic measures may affect the nation’s fiscal health temporarily, revenue increases from the consumption tax, a permanent source of money, can help decrease the fiscal burden in the end. (Abridged)

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