Prime Minister Shinzo Abe said he’ll delay an increase in Japan’s sales tax until 2019, a move that may help support consumer spending. The rise in the sales tax from 8% to 10% was initially meant to take place in October 2015, but it was then moved to April 2017 and has now been pushed back even further.
“Japan will proceed with structural reforms and mobilize fiscal policy to achieve strong growth,” Abe told lawmakers from his ruling Liberal Democratic Party on Wednesday. “I want to fulfill my responsibility by speeding up Abenomics even more. In that context, I decided to postpone the increase in the sales tax to 10 percent by two-and-a-half years.” he added.
This is the second time that Abe has delayed the increase in the sales tax to 10 percent from 8 percent, after a rise from 5 percent in April 2014 tipped the economy back into recession. The sales tax was first introduced in 1989 at a rate of 3%. The last time Japan went ahead with sales tax rise to 8% from 5% in April 2014, the economy sank into recession. Growth has been uneven since then.
Putting off the increase may improve Abe’s prospects in the upper house election which is expected next month. On the other hand, the decision will fan doubts over the government’s ability to rein in Japan's debt burden and will remove a source of funding for ballooning social security costs in one of the world’s most rapidly aging countries. Those favoring a delay argue that Japan's recovery is too weak to endure a fresh hit to consumer spending from a tax hike that could actually cause government revenues actually contract.
Fitch ratings Agency has cautioned about the move, says will await government's revised fiscal plans before drawing conclusions for Japan's ratings.
“If Japan's government has decided to delay the consumption tax increase scheduled for April 2017 as reports indicate, it would undermine the credibility of the political commitment to fiscal consolidation. However, Fitch will await further detail on the government's revised fiscal plans before drawing conclusions for Japan's ratings.” said Andrew Colquhoun, Head of Asia-Pacific Sovereigns, Fitch Ratings.
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