Japanese premier Shinzo Abe is looking to quietly ditch a pledge to balance the budget by fiscal 2020 in favour of a looser debt-to-GDP ratio target, a move that gives him a free hand to delay again an unpopular sales tax hike, government sources say. Any fiscal slippage would mean Japan keeping its money printing presses running longer, and would break a commitment to G20 countries. That could risk provoking fresh accusations of currency manipulation from the United States and other G20 countries if they saw Japan’s move as a further attempt to keep the yen weak.
Abe also has to be careful of the potential market reaction. Any reduction in the commitment to whittling down a public debt, that at twice the size of the economy is the worst among major economies, could risk damaging investor confidence in Japan. While Abe is unlikely to have decided yet on whether to proceed with a scheduled sales tax hike in 2019, there are plenty of reasons to postpone it, the government sources say. Abe’s aides say the premier, who twice delayed a hike to 10 percent after an increase to 8 percent in 2014 pushed Japan to the verge of recession, won’t risk cooling the economy again.
“I think the prime minister understands that putting off the sales tax hike is in the best interest of fiscal consolidation,” said Satoshi Fujii, a special adviser to Abe.
Having seen his support slump from a series of scandals, Abe must decide whether to move ahead with the tax hike by mid-next year – around the time he could call a general election that must be held by late 2018. But, even the International Monetary Fund said last week that sustaining economic growth should take priority over consolidating the budget for now.
“What’s most important is to maintain growing momentum in the economy so that growth becomes sustained,” IMF Deputy Managing Director David Lipton told Reuters on Monday.
“It’s a good time to make sure that there’s not a premature consolidation that halts the economy,” he said after annual Article 4 consultations with Japan. Having notched five straight quarters of growth, Japan’s economy is on its best run in a decade, but it is hardly impressive.
Growth in the first quarter of this year was an annualised 1.0 percent, and the economy face numerous structural challenges, notably over-reliance on exports, slow wage growth handicapping domestic demand, and an aging population.
Abe came to power in 2012 promising to wrench Japan’s economy out of nearly two decades of deflation, but the jury is still out on whether he is succeeding. With that in mind, Abe has repeatedly said Japan should fix its finances by boosting growth and tax revenues, rather than resorting to fiscal austerity steps, and has set a target to raise Japan’s nominal gross domestic product (GDP) to 600 trillion yen.
Rather than risk a market backlash, the government kept a reference to the budget-balance target in its annual fiscal guidelines for this year, even though sources say there is a near-consensus in the administration that it won’t be met. But in the clearest sign yet that Abe was back-tracking on the budget goal, the guidelines – announced on June 9 – also included a pledge to simultaneously lower the debt-to-GDP ratio, which could help save face over any slippage on fiscal reform.
The debt-to-GDP ratio is easier to meet as it improves as long as nominal GDP grows more than borrowing costs, and those can be contained by the Bank of Japan’s ultra-easy policy, the government sources said. “Even if the budget-balance cannot be achieved, the government can argue it passed the grade if the debt-to-GDP ratio improves temporarily,” said one of the sources.
This year’s guidelines also made no mention of the need to raise the sales tax, contrary to past years when the government referred to it as key to restoring fiscal health.
“There wasn’t even discussion on the tax hike in government panels,” one source said. Another source said the reference may have been removed to give Abe room to delay the tax hike. Abe’s aide Fujii said such changes to the guidelines meant the government is no longer committed to the budget-balance target and will instead focus on lowering the debt-to-GDP ratio.
“You could say the government is obligated to increase spending by 3 to 4 percent this year and next year, because it is targeting a 600-trillion-yen economy,” said Fujii, a professor at Kyoto University. Watering down the fiscal target is not without risks.
The Bank of Japan could be forced to delay its exit from a massive stimulus, the sources say. That, in turn, could provoke fresh allegations of currency manipulation from U.S. President Donald Trump, and leaders of other G20 countries. “There would be criticism from the G20, because the economic impact would be the same as bankrolling government spending and influencing the currency,” Akihiko Noda, senior economist at Mizuho Research Institute, said. “Japan shouldn’t take the G20 lightly.”