Abenomics Endures: Japan’s Unyielding Tax Policy

As early as last year, Japan’s Prime Minister Shinzo Abe announced that the country could expect a rate hike in consumer tax rates. Last year, it was slated to take effect beginning 2017, but the agenda has since then been moved up quite a bit. Economists are predicting the economic plan may take place as early as late 2016 or very early 2017, as opposed to the previously believed mid to late 2017 timeline. Japan is required first and foremost to think about its own economy and whether or not its consumers could handle another rate hike, but other global factors have become more pressing since Abe’s initial announcement in 2015.

Japan’s tax increase is necessary in order to maintain the public works and welfare program. The secondary effect is to be able to secure investor confidence in the international community. The island nation has stood by these sentiments since they were announced, along with the formal approval of its $850 billion USD budget for 2016. This is very similar to Abe’s instruction in 2014, when the sales tax rose 3%. The new budget accommodates a 1.5% increase in defense expenses as Japan seeks to enforce its new defense measures. 

Recent concerns over Japan’s new security law, effectively allowing the military to defend allied troops (including U.S.) under foreign attacks, is the first time Japan has authorized something of that nature since World War II. The security law was initially intended to enforce Japan-U.S. relations, but it has fared well in helping to reassure the global community of Japan's goodwill. The new law might be another unpopular decision made by Abe, at least as its citizens view it, but just as he will not budge on the security laws, Abe has stood firm on the tax hike.

Despite its recent stagnation and the recent 2.3% dip in retail sales during February, the Prime Minister has stood firm on the decision to hike rates. The country is once again on the brink of recession and the economy is slowing down, but that’s due more in part to global macro trends than anything yen-specific. As is typical with Japan’s PM and his Abenomics policy, an additional stimulus package has been promised to take effect later this year. Regardless of the situation with global commodities or American and European decisions on their respective monetary policies, Japan will be increasing its consumer tax rate, and maybe even earlier than expected.