Japan's prime minister said Wednesday that he will delay a consumption tax hike that threatened the fragile economy, but analysts said the move highlighted his failure to spark growth. Shinzo Abe announced his decision to members of the ruling Liberal Democratic Party (LDP) in televised remarks ahead of a press briefing expected around 6:00 pm local time (0900 GMT).
The premier said the levy hike, planned for 2017, would be pushed back by more than two years to late 2019, when he is likely no longer in office. The decision also threatened to rekindle fears about Japan's ability to finance a staggering national debt, one of the worst among rich nations. "I have made a decision to postpone the rise in the consumption tax to 10 percent by two and a half years," in the hopes of "revving up" growth, he told LDP lawmakers.
Abe - who swept to power in late 2012 on a pledge to kick-start growth with his Abenomics policy blitz - is also expected to announce fresh spending that could amount to as much as 10 trillion yen ($90 billion), the top-selling Yomiuri newspaper reported. Japan avoided a recession in the first quarter with a 0.4 percent expansion in gross domestic product. But there are widespread fears that another sales tax hike would take a bite out of consumer spending, and damage the world's number three economy. Tokyo's last sales tax rise in April 2014 - the nation's first in 17 years - was blamed for stalling a nascent recovery and pushing Japan into a brief recession.
But some critics have warned against delaying a second tax rise seen as crucial to paying down Japan's staggering national debt. The International Monetary Fund has repeatedly called on Tokyo to get its fiscal house in order. Government coffers are deep in the red, with public debt standing at twice the size of the economy, as social welfare costs balloon in the ageing nation. "It's hard to say that 'Abenomics' has been successful if (Abe) has to postpone a tax hike," said Masamichi Adachi, senior economist at J.P. Morgan in Tokyo.
Much of Japan's debt is held domestically at extremely low interest rates which have so far allowed the country to avoid a Greek-style crisis. But there are fears that a loss of confidence in Tokyo's ability to pay could send interest rates soaring and, in the worst case scenario, raise the possibility of bankruptcy. Last year, the government postponed raising the tax from the current eight percent to 10 percent until April 2017. But at a G7 summit last week, Abe hinted at another delay as he warned over the looming "crisis" in the global economy, despite earlier claims he would not push back the second tax hike.
Abe compared it to the situation before the collapse of Lehman Brothers in 2008, which set off the global financial crisis - a claim rejected by some of his rich nation counterparts. Abe has previously said his government would only push back the long-planned tax hike in the event of "a grave situation" - on the scale of the collapse of Lehman Brothers or a major earthquake. Abe's blueprint for igniting the once-powerhouse economy consisted of a mix of massive central bank monetary easing, government spending and efforts to slash red tape.