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Tuesday, November 18, 2014 12:37 PM

Abe Makes "Grave Grave" Decision to Delay Tax Hike, Gambles on Snap Elections, Seeks "Better Ideas"

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In the wake of a completely "unexpected" Japanese return to recession, Shinzo Abe Delays Tax Rise and Gambles on Snap Election.

Rumours had been building in recent days that Mr Abe was preparing to dissolve parliament as he sought a new mandate to delay a second increase in consumption taxes, due next October. On Tuesday evening Mr Abe confirmed in a rousing 15-minute speech that he would go to the polls, challenging detractors to come up with better ideas to put Japan on a stronger growth trajectory.

Delaying the tax by 18 months was a “grave, grave” decision, Mr Abe said, but would be justified if Japan was to make a complete exit from the deflation it experienced for much of the past 15 years.

The weak data have caused many to question the multi-faceted revitalisation programme Mr Abe has pursued since reclaiming the premiership less than two years ago. So far, the most obvious effect of those efforts has been a collapse in the yen, which has boosted companies’ profits but pushed up people’s cost of living – a squeeze exacerbated by April’s tax increase, from 5 per cent to 8 per cent.

Household incomes have risen a little, boosted by overtime and bonuses. But base wages slipped 2.6 per cent in September when adjusted for inflation, the government reported on Tuesday, extending a stretch of year-on-year falls from May 2013.

“The trend hasn’t changed,” said Yukio Edano, secretary-general of the main opposition party, the Democratic Party of Japan, after Mr Abe’s address. “Even though share prices have risen over the past two years, the lives of the public have not improved.”
Not Improved or Gotten Worse?

With inflation-adjusted wages down 2.6%, and taxes up 3 percentage points from 5% to 8%, "lives of the public have not improved” is the understatement of the year for those in Japan not invested in the stock market.

In fact, those lives are 5.6% worse.

Better Ideas

Abe, the man who made lives 5.6% worse, challenges others to come up with "better ideas". Here are two of Abe's ideas.

  1. Abe announced a tax hike to 10 per cent “without fail” in April 2017
  2. Government would honour its longstanding pledge to balance its books – excluding debt-service payments – by the 2020 fiscal year

Abe's Deal

Abe plans to implement the same disastrous tax hike that just plunged Japan into recession. And whether or not Japan has improved by 2017, Abe will hike taxes again anyway.

Secondly, Japan's national debt, approaching 250% of GDP, will rise further until 2020. Indeed it will keep growing after that, because the promise to balance books excludes debt-payment service (interest on the national debt).

It seems to me it would be easy to come up with "better ideas", but one should always fear "better ideas" from any politician. My take: Any genuinely better ideas won't be implemented.

In the meantime, the Bank of Japan is buying over 100% of all Japan's debt issuance, so the debt (and interest on the debt) keeps piling up, while a demographically aging Japan requires more health-care services every year.

Expect the Unexpected

Each announcement like this strengthens the odds Japan is going to face a full-blown currency crisis within a couple years or less.

Rest assured, when the crisis does occur, it will be "unexpected" by nearly every economist on the planet.

For further discussion of how the "unexpected" happens, please see "Mystery of the Unexpected" Explained; Japan Slides Into Recession Yet Again; Blue Ribbon Panel in Review.

Mike "Mish" Shedlock

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