As expected, Japanese Prime Minister Shinzo Abe will delay the second part of the controversial sales tax increase and ask voters for a fresh mandate on December 14.
Mr Abe confirmed the worst kept secret in Japan last night and said he would dissolve the country’s lower house of parliament this Friday, just two years after winning power.
He said he would delay a planned rise in the nation’s sales tax to 10% by 18 months, until April 2017 instead of next October.
Rumours of the snap poll started circulating a week ago, but it was the shock news on Monday that the economy slipped into recession in the third quarter, which made the decision a certainty.
That could be reversed when more economic data becomes available for the second estimate on December 8, but the uncertainty caused by the snap poll could hold back growth in this quarter
The main driver of the 1.6% (annual) slide in growth, after the 7.3% fall in the June quarter was the April 1 lift in the country’s sales tax to 8% from 5%. A further 2% increase was planned for October, 2015.
Japan has four year terms, so a general election was not needed until late 2016. It now looks like a big mistake not to have lifted the tax by the full 5%, as many had advocated.
It would have crunched the economy a bit more than the 3% rise did, but the pain would have been over in one hit, without the second increase hanging over the economy.
But Mr Abe is said to want more time to continue implementing his so-called “Abenomics” strategy of ultra-loose monetary policy, spending and reforms, especially to labour laws.
The tax rise was linked to a start to repairing the government’s revenue base and deficit.
So far Mr Abe’s policies (which are linked to the huge spending program of the Bank of Japan which was expanded at the end of October) have boosted share prices to seven year highs, dropped the value of the yen to seven year lows against the greenback, and dragged the country out of the deflationary rut it had been in for much of the past two decades.
But inflation is slowing and is now forecast to fall lower unless the weaker yen boosts prices – falling oil and gas prices are adding to the downward pressure on inflation. Base wages are falling (wages measured in other ways are up slightly), retail sales are weak, unemployment is solid, and corporate profits are at near record levels.
But exports have not kicked higher as the yen has fallen, import costs have risen (that’s the positive impact on inflation) and business investment, one of the major drivers of economic growth in Japan, has not rebounded with the strength the government and the central bank had been hoping for.
