Abe goes ahead and orders the tax increase

From Bloomberg:

Japanese Prime Minister Shinzo Abe proceeded with an April sales-tax increase and a 5 trillion yen ($51 billion) stimulus plan as he tries to rein in the world’s biggest debt burden without negating efforts to end deflation.

“The next focus is solely on the growth strategy,” said Naohiko Baba, chief Japan economist at Goldman Sachs Group Inc. The planned stimulus package will help safeguard the economy “from the risk of faltering under the weight of the sales tax,” he said.

The economy will contract an annualized 4.5 percent in the three months after the sales tax is increased in April before returning to growth, according to the median calculation of economists surveyed by Bloomberg News. For the 2014 calendar year, the expansion is seen slowing to 1.6 percent from 1.9 percent this year, the median estimates show.

It´s always interesting to note how they like to “hedge”: Increase the tax to help reign in the debt and at the same time introduce some fiscal stimulus to “safeguard” the economy!

What Japan needs to do is keep doing what Abenomics said it would. Since their explicit target is 2% inflation, they will have to ‘factor out’ the tax increase. In the past they didn´t and we know what happened. If the BoJ´s Kuroda does his job well Japan has a fighting chance to progress, and the median calculation of economists that expect a short-term contraction following the tax will not pan out.

The charts below illustrate the Japanese story since just before the consumption tax (“CT”) hike of 1997. With the 1997 tax impact inflation shot up, a temporary effect, but the BoJ thought it appropriate to contract spending! The same happened with the oil shock of 2008. It is encouraging to see that Koizumi´s QE, which was nothing like what Abe has promised, had a visible effect.

 

Update: This WSJ article is skeptical:

The Ministry of Finance and its tribe in the legislature have promoted the tax as a signal that Japan will cut its fiscal deficit and honor pension promises to its growing elderly population. It is expected to raise $88 billion in its first year. But Mr. Abe announced Tuesday that he would spend $51 billion of that on public works and tax rebates, supposedly as a “stimulus” to offset the tax increase.

The upshot is that Mr. Abe’s fiscal economic thinking is more of the same for Japan. With the government already spending more than 40% of GDP and the national debt above 200% of GDP, and after two decades of failed spending programs posing as stimulus, he believes that Japan can tax and spend its way to prosperity.