Still Reluctant to Taxation

It should be the green signal for raising consumption tax rate. Growth rate in the second quarter this year marked sound recovery from deflation. Prime Minister, Shinzo Abe has been telling that he would consider the tax hike watching closely the situation of economy in the second quarter. Nevertheless, he still looks reluctant to do that. This depends on which voices should be heard: the Ministry of Finance or his private adviser.

The Cabinet Office on Monday released the provisional result of gross domestic products in the second quarter, April to June, of this year. The real GDP, excluding fluctuation in commodity price, marked 2.6% of rise in conversion to annual rate. The nominal GDP also showed stable growth with 2.9%. It was three-quarters consecutive plus both in real and nominal.

In the law which determined consumption tax rate to be raised by 3% next April and by additional 2% in October 2015, improvement of economic situation is one of the conditions for introducing new rate. To assess the situation, 3% growth in nominal and 2% growth in real are the benchmarks for that. The statistics in the second quarter this year were getting closer to the level.

However, the substance of recovery has not improved so much. Contributors to the growth in the second quarter were still export and individual consumption. Basic reason for the growth in export was favorable foreign exchange rate with cheap yen. With somewhat baseless optimism and concern against taxation in the future, individual consumption showed moderate increase. On the pessimistic side, asset investment slightly declined, marking six quarters consecutive down. Industries are not as hopeful as individuals about their future.

Although the stats showed overwhelming recovery from slump, Abe keeps on cautious in making positive statement for tax hike. It is mainly because his economic advisers, represented by Koichi Hamada, are still against raising consumption tax rate, because of its negative effect on economy. Ministry of Finance, on the other hand, does not consider the possibility of postponing tax hike, taking it for granted.

Abe was a member of upholders of “flood-tide” economy, which depends on economic growth to improve fiscal situation. For him, it is of highest priority to recover the economy, rather than putting a brake on further increase of fiscal deficit. That is why he is reluctant to decide tax hike, without any assurance of economic improvement. Nobody knows whether the world is waiting for his decision until it is labeling Japan as not serious about its deficit.