The threat of ‘Abegeddon’
Posterity is watching carefully as Shinzo Abe goes ahead with a sales-tax increase aimed at getting a handle on Japan’s huge debt burden, the world’s largest. Unfortunately, history may judge him no better than Ryutaro Hashimoto, the last Japanese prime minister to kill an economic recovery with ill-timed fiscal tightening.
That’s not the conventional wisdom of the moment. Markets are euphoric over surging confidence among large Japanese manufacturers. September’s jump in the quarterly Tankan (JNTSMFG) index - to the highest level since before the Lehman Brothers Holdings collapse in 2008 - gave Abe just the tailwind he needed to raise the consumption tax to 8 percent from 5 percent starting in April with a further 2 percent increase in the cards for 2015.
Yet Abe is ignoring two things that could end his revival program, dubbed Abenomics: the precedent set by Hashimoto, Japan’s 53rd prime minister, and the specter of inflation.
Hashimoto’s 1997 sales-tax increase scuttled Japan’s best chance at strong growth in a decade. By the time Hashimoto left office in 1998, business leaders were deriding him as Japan’s Herbert Hoover, the 31st president who botched the U.S. exit from the Great Depression with badly timed austerity measures.
Inflation heightens the risk that Abe is making the same mistake. The government hailed news last week that consumer prices are rising at the fastest pace since 2008 as a vindication of Abenomics. Yet the 0.8 percent jump in prices - excluding fresh food - in August was purely an energy story, driven by a surge in costs for fuel imports.
The yen’s 20 percent slide against the dollar this year through August comes just as Japan’s demand for fuel imports is skyrocketing. Safety concerns have shut down all of the country’s nuclear reactors since the March 2011 earthquake and tsunami that wrecked the Fukushima power plant. Japan desperately needs gas, oil and coal to reactivate conventional power stations. And Japan is a price taker in global markets, not a price maker.
“Increases in fuel procurement costs impose a heavy burden on the Japanese economy,” Trade Minister Toshimitsu Motegi said in Tokyo recently.
That burden could lead to something even more ominous: stagflation. Alexander Friedman, chief investment officer at UBS AG, calls the prospect “Abegeddon.”
“We’ve had something like 13 stimulus programs in Japan since 1999, so we do have to see if there is a sustainable handoff to growth,” Friedman told Bloomberg Television’s Francine Lacqua on Sept. 27. “Months ago, I said the big risk on Japan might be what I would call ‘Abegeddon,’ instead of Abenomics, which would be a scenario where there is no growth, but there is inflation, so call it stagflation. Given Japan’s debt to GDP, that would be a tragedy. So I think it is too early to declare victory here and too early to say we have a sustainable path forward for Japan.”
What if raising taxes actually increases Japan’s debt load instead of cutting it? Abe is being goaded into it to avoid credit downgrades. International Monetary Fund officials are among those urging Tokyo to fix an ugly national balance sheet, which has been made worse by a shrinking population. The risk, though, is that a tax increase will dissuade Japanese from spending, while higher energy costs squeeze companies.
Lawmakers are already clamoring for stimulus to offset the new tax levies, which would deaden the fiscal benefit anyway. Why bother raising taxes in the first place - especially now, just as Abenomics is trying to gain traction? Besides, as University of Tokyo economist Takatoshi Ito argues, making a dent in a debt more than double the size of the economy would require a 20 percent sales tax - something no economist is seriously advocating.
A better strategy would be to push through the sweeping deregulation Japan has avoided since 1990 in order to catalyze growth. Why not use the next six months to enact crucial elements of Abenomics? The government could cut the red tape that prevents entrepreneurs from starting new companies, negotiate entry into the Trans-Pacific Partnership, unveil new energy policies and announce quotas on female board members.
If Japan had done any of these things a decade ago, it wouldn’t have to burden consumers now. Sadly, lawmakers squandered the last two years debating how to raise taxes rather than how to improve the country’s competitiveness. Abe may not be courting a depression, but a Hashimoto-like recession can’t be ruled out. If he wants to give Japanese a brighter future, he should start by avoiding the mistakes of the past.
*The author is a Bloomberg View columnist.
by William Pesek