Japan PM delays tax hike and dissolves parliament

 
Chris Papadopoullos
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Abenomics has rallied Japanese stocks but is struggling to produce inflation and growth
Japan's Prime Minister Shinzo Abe will go ahead with plans to postpone a planned hike in the controversial consumption tax.

The tax was originally planned to be raised in October 2015, but will now stay at its current level for another 18 months – until April 2017.

Abe made the announcement at a meeting of his Liberal Democratic Party (LDP) yesterday, where he also said he would call a snap election.

“The general election – not required until December 2016 – will give Abe the opportunity to reshuffle the cabinet (plagued by political-funds scandals in October) and reassert his own, and the LDP’s, mandate,” said analyst Alison Evans from market information providers IHS.

The increase in the consumption tax from five per cent to eight per cent in April 2014 was seen by many economists as the cause of the new recession that began in July.

“The combination of the Prime Minister Abe postponing the planned consumption tax hike and dissolving the Lower House is well timed and is the crucial point for the success of Abenomics. Japan’s economy is like a child carrying a glass vase – it can make it to the other side but can also fall apart. This vote cannot fail,” said economist Genzo Kimura from Sumi Trust.

“Abenomics” was Abe’s three pronged approach to boost growth and defeat the deflation that has plagued the Japanese economy since the early 1990s. It involves fiscal and monetary stimulus as well as structural reform, but has so far failed to achieve its goals.

Data released on Monday showed the economy contracted from July to September, meaning the economy was in recession. However, many believe it is unlikely to dent Abe’s popularity as the opposition remain fragmented.

“It is unlikely that the majority of voters will vote against PM Abe if he goes ahead with this plan, with the likely outcome of the ruling coalition of the LDP and Komeito swooping to victory,” said Kimura.

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