By Hiroshi Miyajima and Hironori Takechi

Etsuro Honda, 64, an economic adviser to Prime Minister Shinzo Abe, sat down for an interview with the Mainichi Shimbun on May 21. The former ambassador to Switzerland gave his view on the planned consumption tax hike from 8% to 10% in October. He underscored: “The plan to raise the consumption tax should be frozen. It could bring a shock on par with the Lehman shock to Japan in the face of accumulating risks (such as concerns about a global economic downturn caused by the escalated trade friction between the U.S. and China).”

Honda revealed that he directly conveyed his opinion to the prime minister on April 3. He also projected, “The prime minister will decide the appropriateness of the tax hike by the time the Group of 20 summit is held (in Osaka City in late June).”

Koichi Hagiuda, executive acting secretary general of the ruling Liberal Democratic Party and a close aide to the prime minister, mentioned the possibility of delaying the tax hike in April. There are rumors that the prime minister will hold a “double election” by dissolving the Lower House to coincide with the Upper House election in summer to seek voter understanding for the postponement.

The government firmly maintains the stance that it will “raise the tax as planned unless something as drastic as the 2008 Lehman Brothers collapse occurs.” Also, the preliminary data released on May 20 showed that Japan’s gross domestic product (GDP) was solid, having grown at an annualized 2.1% in the January-March quarter. But Honda pointed out, “Items related to domestic demand were very weak.” He said, “We can’t let consumer sentiment decline in order to achieve a stable virtuous cycle toward overcoming deflation.” He added: “A simple postponement of the hike would still make people consume less. So the idea should be frozen.”

The government included new policies premised on a tax hike, such as a free preschool education program, in the budget for this fiscal year. So some say it is too late to reconsider [the tax hike]. But Honda said: “It’s wrong in the first place to fund free preschool education and other programs with the consumption tax (which imposes a heavier tax burden on low-income earners). Such programs should be funded through strengthening the inheritance tax and the taxation on financial income. They can be covered with deficit-financing national bonds for the time being.”