Slower tax revenue growth in aging Japan puts Abenomics at crossroads

https://www.japantoday.com/category/politics/view/slower-tax-revenue-growth-in-aging-japan-puts-abenomics-at-crossroads

TOKYO —

As Japan takes on the elusive challenge of fiscal reconstruction, slowing tax revenue growth is casting a shadow over the future of an aging Japan.

That bodes ill for Prime Minister Shinzo Abe, who has touted recent growth in tax income since taking office in 2012 as one of the achievements of his Abenomics policy mix.

Under a draft fiscal 2017 budget approved by Abe’s cabinet, the government expects a 0.2% increase in revenues from corporate, income and sales taxes to 57.71 trillion yen ($490 billion).

The yen’s advance against other major currencies prompted the government to cut its fiscal 2016 tax revenue estimate from its initial plan by 1.74 trillion yen and issue additional government bonds even before the year ends in March.

Securing stable tax revenues is seen as a top priority at a time when Japan’s aging population is expected to increase already ballooning social security expenses in the years ahead.

“Japan’s tax revenues are easily swayed by currency moves just as we saw in fiscal 2016. We need to think about how to reduce such volatility,” said Takuya Hoshino, an economist at the Dai-ichi Life Research Institute.

“For now, the yen has been weakening (since the election of Donald Trump as the next U.S. president), which could lift tax income. That said, though, the opposite is also true” should the yen strengthen, Hoshino added.

Earlier this year, Abe postponed raising the country’s sales tax to 10%, originally planned for April 2017, to October 2019 as the economy lacked vigor. The hike is aimed at increasing state revenue to pay for social security.

Japan also relies heavily on issuance of government bonds for revenues, making it an urgent task to improve the country’s fiscal health, which is now the worst among major developed countries.

Debt-servicing expenses, accounting for some 24% of next year’s total spending, are expected to drop 0.4%, after the Bank of Japan’s policy to keep the benchmark 10-year bond yield target at around zero enabled the government to lower its assumed interest rate used in compiling the budget.

The Organization for Economic Cooperation and Development has said that Japan heeds to implement “a more detailed and credible consolidation plan, including a path of gradual increases in the consumption tax” to sustain confidence in its public finances.

The Paris-based organization added that investment in education and training is required to boost the country’s growth potential.

Ahead of Thursday’s cabinet approval, lawmakers from the ruling Liberal Democratic Party praised the budget plan as “balanced,” saying money is allocated adequately to boost the economy.

The Japanese economy grew an annualized real 1.3% in the July-September period. Domestic demand remains weak despite efforts by the government and the BOJ to jolt it out of prolonged deflation.

Under the fiscal 2017 budget, the government is seeking to encourage more workers to enter sectors suffering from labor shortages such as nursing care. It also aims to set the stage for industrial innovation as the networking of everything from home appliances to cars and factories progresses.

“It’s obvious that spending on growth areas gets cut when social security costs continue to increase,” said Yasuhide Yajima, chief economist at the NLI Research Institute.

“In terms of limiting annual growth in social security costs and reducing issuance of government bonds, you may say the goals have been achieved,” Yajima said. “But what we need to do is to invest in people.”

By fiscal 2020, the government aims to turn Japan’s deficit in the primary balance into a surplus and achieve 600 trillion yen in nominal GDP under the Abenomics program. For now, however, some economists said neither of the targets appears to be within reach.

Hoshino of the Dai-ichi Research Institute sees a growing trend toward adding fiscal stimulus as the global economy is experiencing low growth.

“When it comes to fiscal spending, it’s often the case that an extra budget is compiled for short-term purposes. But a long-term perspective is more important if Japan aims to achieve economic growth and fiscal consolidation,” Hoshino said.

© KYODO

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