The biggest problem with Abenomics, as the “three arrows” stimulus launched in 2012 by Shinzo Abe, prime minister, is known, is that Japan never did enough of it. That is true of the first, monetary arrow. All through last summer and autumn the Bank of Japan sat on its hands as the economic data weakened, until it adopted negative interest rates in January.
It is even more true of the second arrow: fiscal policy. Although Mr Abe began his term with fiscal stimulus in 2013, that quickly became a large fiscal contraction in 2014, when consumption tax rose from 5 to 8 per cent. With demand weak, the fiscal squeeze drove Japan into a recession from which it has never fully recovered.
Mr Abe faces the same choice again. Japan’s economy is still struggling, hurt by China’s slowdown, and yet the tax is due to rise again to 10 per cent next spring. The public knows the increase is coming; it already weighs on sentiment and demand.
The appropriate action is clear: Mr Abe should postpone the tax rise and he should do so as soon as possible. Rather than reschedule it for a particular date, he should pledge not to go ahead until the economy is strong enough to absorb the blow.
This week, the Japanese prime minister vowed to do precisely the opposite, saying he will push ahead with raising the consumption tax unless there is “a catastrophic situation such as the Lehman Brothers shock or a major natural disaster”.
That seems to leave little room for manoeuvre. But a U-turn would be popular with the public and Mr Abe’s advisers will have little difficulty finding a justification if needed.
Mr Abe has ordered his finance minister to bring forward spending from the current year’s budget, a sensible if limited move. He has also been meeting a series of economists, such as Nobel laureates Joseph Stiglitz and Paul Krugman, who seem cherry-picked to argue for a delay in raising consumption tax. Those meetings will continue on Mr Abe’s upcoming visit to Washington.
Japan’s finance ministry, supported by much of the business community, wants to raise the tax because of worries about high public debt and deficits. This concern is understandable and makes sense in the long run.
Indeed, there is little doubt that Japan will eventually have to raise consumption tax well above 10 per cent to fund healthcare and pensions for its ageing population.
But raising taxes now, when the economy is still weak, is self-defeating. It reduces demand and keeps inflation trapped at zero. That in turn creates pressure for more government spending to stimulate the economy, reversing any decline in the deficit. Japan has repeated this counterproductive cycle again and again in recent decades.
If Abenomics is to break Japan out of its long-running trap of stagnant prices, it is crucial not to choke off demand until the economy is booming, and inflation is on the rise. Instead of seeing any economic pick-up as a chance to tackle the budget deficit, Japan should use consumption tax increases as a brake to slow the economy down, but only once it is already running at full speed.
Mr Abe has a broader opportunity, too. He chairs the G7 this year and has signalled a wish for co-ordinated action to drive global growth.
If he could parlay a delay in raising Japan’s consumption tax into action by other advanced countries, then he would not just have improved the outlook for his own stimulus programme but would have done the global economy a favour as well.
