(c) 2013, The Yomiuri Shimbun.
(c) 2013, The Yomiuri Shimbun.
TOKYO — Prime Minister Shinzo Abe's difficult decision to raise the consumption tax to 8 percent next April came after a fierce debate behind closed doors within the government and the ruling parties.
"If the tax is raised, it may send the Japanese economy back to the economic doldrums. I thought this over and over again until the very last minute," Abe said at a press conference in announcing the tax hike on Tuesday.
For his administration, which has turned the task of bringing the nation out of a deflationary phase into a priority, the greatest worry is the possibility of an economic slowdown caused by the tax hike.
During his press conference, Abe cited the example of Mori Shigetaka (1725-1789), a feudal lord who invested in the development of new rice fields using increased tax revenues collected through land surveys in the middle of the Edo period (1603-1867).
"That investment made for the future proved to be a driving force leading to the Meiji Restoration," Abe said. While superimposing his own feats onto those made by such forerunners, he indicated his hope for having the 5 trillion yen ($50 billion) economic stimulus package, to be compiled in December, help realize wage increases and job increases.
In the afternoon of Sept. 10, Deputy Prime Minister Taro Aso, Chief Cabinet Secretary Yoshihide Suga and Akira Amari, state minister for economic revitalization, were seated in a circle around Abe at Abe's executive office in the Prime Minister's Office.
"What do you say? It's worth 5 trillion yen," Aso said proudly as he distributed documents containing economic measures designed to soften the blow of the consumption tax hike.
Until shortly before, the Finance Ministry was saying that the economic measures would be worth only up to 2 trillion yen. Aso allegedly had senior ministry officials raise the stimulus to 5 trillion yen.
However, Abe balked at Aso's proposal, believing it would only stress more fiscal spending, such as public works spending.
"The Finance Ministry has been preoccupied with a temporary drop in revenue. It lacks a perspective that a corporate tax cut will eventually lead to economic revitalization," Abe said, showing more interest in the idea presented by Amari.
While identical in the total scale of the outlays, Amari's idea contained a 2.5 trillion yen tax system reform measure, including bringing forward by one year the scrapping of the special corporate tax designed for post-disaster reconstruction.
"I hoped you'll go along with this line," Abe told the other three.
"Well, it can't be helped. I'll do my best," Aso replied.
At the meeting, the four confirmed that the government would carry out economic stimulus measures worth 5 trillion yen, which is equivalent to the tax revenue increases through a two percentage point hike in the consumption tax. It was the moment when the decision to raise the tax to 8 percent was made.
Since becoming prime minister for the second time in December last year, Abe has repeatedly told his aides, "It's irrational to raise the tax in the midst of efforts to overcome deflation."
Koichi Hamada and Etsuro Honda, special advisers to the Cabinet and Abe's brain trusts for economic policies, had insisted that if a tax increase were carried out at the wrong time, it would be counter-productive.
Hamada and Honda had also recommended that Abe appoint a person who could implement bold monetary-easing policies to the post of Bank of Japan governor. Also in line with their opinion, Abe appointed Haruhiko Kuroda, resulting in a rise in stock prices and depreciation of the yen.
Believing that the "opinions of Mr. Hamada and Mr. Honda are more appropriate than those of the Finance Ministry," Abe seriously started considering postponing the consumption tax rate increase.
Meanwhile, Finance Ministry officials were doing their utmost to implement the tax increase as planned. The officials, who had desperately wanted to raise the consumption tax rate, expressed concern over Abe's view.
The Finance Ministry included the consumption tax hike in its draft for a mid-term fiscal plan, which stipulates a fiscal rehabilitation schedule. Before the House of Councillors election in July, Administrative Vice Finance Minister Yasushi Kinoshita and other ministry officials explained the plan to Abe at the Prime Minister's Office.
However, Abe told them: "I can't approve a plan with the consumption tax hike as a premise. Take it away." Kinoshita and other ministry officials felt chilled by the experience.
The ministry continued emphasizing to Abe that if the consumption tax hike is not carried out, the credit rating of Japanese government bonds will decline, long-term interest rates will rise and the economy will stall.
Abe and Suga came to distrust the ministry even more than they already did, suspecting it was trying to realize the tax increase even if it led to the collapse of Abe's administration.
At one point, Amari strongly urged senior ministry officials who were hastily trying to compile a tax hike schedule to let Abe decide on the hike as soon as possible. "Don't act outside the boundary of bureaucrats," Amari warned.
However, Abe himself was unable to arrive at a decision. Abe told his close aides, "I'm worried about how a postponement of the tax increase will affect long-term interest rates."
Honda told Abe, "Even if the tax hike itself is necessary, raising the rate by three percentage points at one time will cause an economic slowdown." He proposed raising the rate by one point every year for five years to lessen the possible negative impact of the tax hike.
Abe seized on the idea. In mid-July, he told his aides to study several options — raising the rate by one percentage point annually for five years; raising the rate by two points at first, then one point each year thereafter; and raising the rate by two points at first, then eventually three points.
During the upper house election campaign period, Abe closely examined documents of projections based on each scenario between campaign speeches.
Seeing that Abe was leaning toward reconsidering the original tax schedules, Amari came to believe it was too late to postpone the hike.
Just after the upper house election, Amari whispered to Abe, "If we suffer a setback after implementing the tax hike as scheduled by law, it would be the fault of the Democratic Party of Japan, because it was decided by the DPJ-led administration."
Abe disagreed. "I can't make such excuses," he said. "Policy evaluations should be made toward the administration in power. If prices rise, and wages don't, my administration is through."
However, Abe finally decided to raise the consumption tax rate to 8 percent as scheduled.
The prime minister knew that a law would have to be revised to postpone the hike. He was also concerned that the value of government bonds could plunge, as financial markets would feel the government was not serious about carrying out fiscal rehabilitation measures.
The law on integrated reform of the social welfare and tax systems has a clause stating that a condition for raising the consumption tax rate was an economic upturn. The former DPJ-led administration of Prime Minister Yoshihiko Noda used this clause to persuade party members opposed to tax hike to change their minds. However, a revision of the law is considered necessary to actually put off the tax hike.
Some LDP members who wanted to delay the hike were bitter about Abe's decision. "The clause means nothing. It's a trick. It's a deep-laid scheme devised by the Finance Ministry," one said.
But quite a few LDP and New Komeito members argued that the hike should be implemented as planned. The DPJ, which led last year's three-party agreement on the tax hike, would have fiercely reacted if the hike was postponed.
If Abe decided to postpone the hike, an "anti-Abe" force could have emerged within the ruling parties.
"This is unavoidable," Abe told close aides, and decided to devote all his efforts in compiling the economic stimulus package to ease the impact of the tax hike. He then focused on cutting the corporate taxes.