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FOCUS: Sputtering economy creates uncertainty over Abe’s tax hike plan

Prime Minister Shinzo Abe has reaffirmed his plan to raise the consumption tax in October, but there is increasing speculation that he could be forced to postpone the hike to safeguard growth in the sputtering economy.

 

Abe told parliament Friday that he would raise the tax as scheduled “unless there is an event on a scale similar to the Lehman shock,” a reference to the 2008 global financial crisis.

 

The government, meanwhile, stressed that the world’s third-largest economy is “recovering,” defying market expectations that it would stop using the word in its latest monthly report amid weaker production and exports due to China’s economic slowdown following its trade conflict with the United States.

 

However, many economists suspect that the latest growth phase, touted by the government as the longest since the end of World War II, has ended, and that raising the tax — to 10 percent from 8 percent — would thrust the economy further into recession by hurting household and business spending.

 

“There is no doubt that the Japanese economy has been in stagnation,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, adding that the outlook is uncertain mainly due to weak exports to China.

 

The conflict between the United States and China, both major trade partners for Japan, is a source of serious concern for Japanese business leaders.

 

Shigenobu Nagamori, chairman of Nidec Corp., said earlier this year that the electric motor maker saw “extraordinary” slides in demand and sales in China late last year.

 

Kuniharu Nakamura, chairman of major trading house Sumitomo Corp., said this month, “Since many countries are integrated into supply chains, (the U.S.-China trade war) will gradually have a negative impact” on the global economy.

 

The combined net profit of companies listed on the Tokyo Stock Exchange’s First Section fell 7.3 percent in fiscal 2018 from a year earlier to 33.5 trillion yen ($306 billion), marking the first decline in three years, on a downturn in China, according to data compiled by SMBC Nikko Securities Inc.

 

Deepening uncertainty over Britain’s plan to leave the European Union has also added to woes for Japanese firms and made them reluctant to make fresh investments.

 

Capital expenditure turned downward and slipped 0.3 percent in the three months through March, according to gross domestic product data released this week by the government, which showed the economy staging stronger-than-expected growth for technical reasons.

 

A number of firms said they have yet to sufficiently reflect the global economic environment in their earnings forecasts.

 

The consumption tax was raised to the current 8 percent from 5 percent in April 2014 in the first stage of the two-stage hike, and the move was widely seen as having nipped Japan’s then economic recovery in the bud.

 

Abe has already postponed the second hike twice to ensure the economy would continue to expand.

 

Economic conditions are becoming tougher compared with the situations that preceded Abe’s two postponement decisions, said Takahide Kiuchi, executive economist at the Nomura Research Institute.

 

The economy is expected to stay on a tightrope as it remains unclear whether it has entered a recession, and Abe is now expected to wait to see whether the United States further raises pressure on China in their tit-for-tat tariff battle.

 

“The fourth round of additional tariffs (by the United States) will likely become a watershed” for Abe to determine whether to raise the tax, said Shunsuke Kobayashi of the Daiwa Institute of Research, referring to fresh levies President Donald Trump has threatened to impose on Chinese imports possibly in late June.

 

Abe will hold a summit with Trump on Monday in Tokyo.

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