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Saturday, August 31, 2013 8:01 PM

Japan Seeks to Hike Taxes then Waste Money on Stimulus to Make Up for Decline in Spending; Currency Crisis Awaits

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Politicians and economic illiterates frequently assume two wrongs make a right. Here is a case in point: Japan panel backs sales tax hike coupled with stimulus.

Japan's government won backing for a controversial decision to raise the national sales tax in 2014 after influential members of a special advisory panel said the step would not threaten economic recovery or business confidence if it was coupled with other stimulus.

Prime Minister Shinzo Abe convened the panel to hear a wide range of views on whether to press ahead with a planned hike in the consumption tax to 8 percent from the current 5 percent in April. Unless Abe changes the plan, the sales tax will be raised to 10 percent in October 2015.

Advocates, including officials at the Ministry of Finance, say raising the tax would be an important first step in trying to lower public debt, which is the worst among industrialized countries at more than twice the size of Japan's economy.

When Japan last hiked the sales tax from 3 percent to 5 percent in 1997, consumer spending tumbled by 13 percent in the quarter after the higher tax went into effect. That was followed by a recession.
Two Wrongs Don't Make a Right

When you cherry pick a panel, and the panel has a pre-determined outcome, the answer always comes out the way you expect.

Thus Abe's blue ribbon panel concluded tax hikes won't hurt. And for good measure, if by some chance they do, the panel suggested wasting those tax dollars on stimulus.

Good grief!

Appearances of Success

 Appearances of success are not the same as success.

It is conceivable that such a preposterous plan might "appear" to work for the simple reason Japan's two lost decades might have finally played out on their own accord.

However, that will not make the policy successful in any real sense. Raising taxes and then wasting the money are never good solutions to anything. Two wrongs don't make a right.

Similarly, economists currently praise Abe's move to weaken the Yen. The Japanese economy is strengthening, but what if it was about to anyway?

More importantly, it's way too early to be singing praises anyway. Japan's national debt is still rising (and that is another reason Abe needs to hike taxes).

Currency Crisis Awaits

I still think the Yen is going to collapse, and that will hardly be any good for a nation that imports most of its energy and food.

A  currency crisis awaits Japan, and when it happens, those singing the praises of Abe will be forced to reconsider (too late of course).

Mike "Mish" Shedlock

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