Abe Bets It’s Different This Time With First Tax Rise Since ’97

Abe Bets It’s Different This Time With First Tax Rise Since ’97

It’s different this time. The four most dangerous words in markets, according to former U.S. Treasury Secretary Larry Summers. With Japan set to raise its sales tax for the first time since 1997, Prime Minister Shinzo Abe’s political future rides on a different outcome than last time — when the nation slid into a recession and the premier lost his job. To avoid a spending slump, Abe, 59, is poised to unveil a stimulus plan to counter the 3 percentage point bump in the sales levy. “Abe must know that breaking the economy would mean the end of Abenomics,” said Masayuki Kichikawa, chief Japan economist at Bank of America Corp. in Tokyo, referring to the initiative to reflate the world’s third largest economy after two decades of stagnation. “The miserable failure of the 1997 sales tax rise is stuck in the mind of Japanese politicians.”The prime minister, who is scheduled to speak tomorrow on his plans for taxes and an economic-support package, was left little room to abandon the planned sales-tax increase he inherited from the previous government. Cabinet members, an independent panel of experts and Bank of Japan Governor Haruhiko Kuroda all advised proceeding with the rise to 8 percent in April, an unpopular move designed to shore up revenue for a government with the world’s largest public debt burden.

Lawmaker Appetite

“From an economic point of view, Mr. Abe doesn’t want to increase the tax — I think he is being forced to do so for political reasons,” said Yoichi Takahashi, an economics professor at Kaetsu University in Tokyo who has advised Abe. “On paper, it means tax revenues will rise — and there will be a lot of lawmakers eager to spend that budget.”

Having run his election campaign in late 2012 on a platform of economic rebirth, Abe has the incentive to deploy yet further stimulus to avert a repeat of 1997, or put pressure on the BOJ – – which is already undertaking unprecedented easing — to expand liquidity injections. What may be just as important is that he has momentum in his favor — gross domestic product rose 3.8 percent at an annualized pace last quarter, after a 4.1 percent gain in January-to-March.

When Prime Minister Ryutaro Hashimoto in 1997 oversaw a 2 percentage point rise in the consumption levy, it coincided with a tightening grip of deflation. After stock and land price bubbles collapsed in the early 1990s, banks began constricting credit. The nation also was hit by diminishing demand abroad as Asian neighbors from South Korea to Indonesia fell into debt crises that required International Monetary Fund bailouts.

1997 Aftermath

GDP shrank after the April 1997 sales-tax bump, recouped some of the loss in July-to-September, then slid back into three straight quarters of decline. The Topix index of Japanese stocks slid almost 10 percent in the 12 months following the escalation in the duty, a period when the MSCI World Index climbed about 32 percent. Hashimoto resigned in 1998.

“Abe understands the danger — if he fails, no one will be able to touch the tax for the next 15 years,” Economy Minister Akira Amari said yesterday on Fuji Television. Amari said if the elevation of the levy to 8 percent doesn’t go well, a further step up to 10 percent in 2015 would be called off. “If the 8 percent hasn’t been a success, there will be no 10 percent.”

Supplementary Package

The government will assemble a 5 trillion yen ($51 billion) package to help counter the impact of the higher consumption duties, according to the median estimate of economists surveyed by Bloomberg News. Among the items likely to be included are expanded tax rebates for companies boosting wages, incentives for capital spending, cash payments to homebuyers and infrastructure investment for the Tokyo 2020 Olympics, according to Deutsche Securities Inc. analysts in Tokyo.

Corporate income tax cuts are also on the table, the government has said. A temporary bump in the rate that was implemented to help pay for reconstruction after the 2011 earthquake and tsunami may be ended one year early, in 2014, Deutsche Securities analysts wrote earlier this month. The Finance Ministry has opposed a permanent reduction in the effective rate.

Compared with 1997, this time round bank loans are rising, the real-estate market is seeing gains in prices and sales and companies are sitting on a near-record cash pile of 220 trillion yen, according to BOJ data. Corporate profits are benefiting from a 21 percent slide in the yen against the dollar in the past year, prompted by BOJ efforts to expand the supply of money.

Corporate Profits

Toyota Motor Corp. (7203), Asia’s biggest car maker, in August raised its profit forecast for the year ending March 2014 to 1.48 trillion yen, as the weaker yen bolstered the value of Japanese cars sold overseas. Panasonic Corp. said this month full-year earnings could beat its forecast thanks to help from the exchange rate. Japan’s second-largest television maker, Panasonic is headed for its first annual profit in three years.

“A slump in private consumption after a hike in the consumption tax” is inevitable in April 2014, Deutsche Securities economists led by Mikihiro Matsuoka in Tokyo, wrote in a research note this month. “But we expect economic activity to turnaround to month-on-month rises from May 2014 onwards.”

Beyond tomorrow’s supplementary budget, Abe is planning a slew of growth-inducing structural reforms later this year, seeking to expand incentives for companies to invest in the domestic economy and boost wages.

Growth Outlook

The impact of the fiscal package, along with the structural measures, means the tax increase “should be almost entirely offset,” according to Credit Suisse AG economists led by Neal Soss in New York. Credit Suisse this month raised its 2014 GDP forecast for Japan by about 1 percentage point, to 2.3 percent.

Such a result would leave Japan with the strongest three years of economic expansion since the late 1980s through 1991, according to data compiled by the IMF. For now, Abe must manage the fallout of tomorrow’s decision on the sales levy, which has been opposed by a majority of the public.

Only 17 percent of respondents to a Nikkei newspaper poll said they were in favor of raising the tax as planned, compared with 55 percent who said they favored a more flexibly paced change and 24 percent who said they didn’t want to see it lifted. Nikkei surveyed 895 people Aug. 23-25 and didn’t give a margin of error. Sliding popular ratings could make ruling Liberal Democratic Party members less enthusiastic about taking on vested interests with Abe’s structural reforms.

“Public support could go down,” said Koichi Nakano, professor of political science at Sophia University in Tokyo. “The only reason why he has been popular is the early success of his economic strategy. If he loses support on that front, that could spark questions about whether he was any good in the first place.”

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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