Tokyo’s success in winning the bid for the 2020 Olympics makes us feel anew that Prime Minister Shinzo Abe is indeed a man of good fortune. Although this good fortune reflects hard work and a so far effective economic strategy on his part, Abe has a number of tough assignments cut out for himself.

　　　There are expected to be substantial positive economic effects of the second Olympics in Tokyo since 1964. The Tokyo metropolitan government estimates nearly \3 trillion yen (US$30 billion) to be spent between 2013 and 2020 as Japan prepares to host the Games. Meanwhile, Daiwa Securities estimates the knock-on effect to be around a whopping \150 trillion (approximately US$1.5 trillion)—\55 trillion yen (US$ 55 billion) in investment and \95 trillion yen (US$95 billion) in a boom in tourism in the same period. Against such a backdrop, one thing looks certain: the Abe administration is determined to raise the consumption tax next April. After a report in the mass circulation daily Yomiuri Shimbun on September 12th that Abe “has apparently made up his mind” to go ahead with the increase as planned, the nation’s mass media have regarded the 3% increase (from the current 5%) as a done deal.

　　　As concerns the merits of the proposed consumption tax, I find the arguments made by Mitsumaru Kumagai, chief economist at the Daiwa Institute of Research in Tokyo, to be quite convincing.

　　　Kumagai, author of A Consumption Tax Will Save Japan (Nihon Keizai Shimbun Publishing Co., Tokyo; 2012), appeared on a regular Internet television show which I host on September 13th. During his appearance, he stressed that the consumption tax hike can hardly be postponed because it will break two of the three “arrows” in the quiver of Abe’s economic plan popularly known as “Abenomics.” The three arrows are: ① an aggressive monetary easing, ② a flexible fiscal policy, and ③ a growth strategy stimulating vigorous private investment.

　　　“If the government postpones the tax hike, arrow ① will come to nothing,” explained Kumagai. “Maintaining fiscal discipline is the precondition for the aggressive monetary easing pursued by Haruhiko Kuroda, the Governor of the Bank of Japan.”

　　　The nation’s revenue is expected to be approximately \40 trillion (US$400 billion) this year, while its budget easily exceeds \90 trillion (US$900 billion). In other words, the government has drawn up the budget for the current fiscal year with the assumption that it will borrow more than twice its expected annual revenue. Of the government bonds being issued to cover the debt, some 70% are being bought by the Bank of Japan, Japan’s central bank. The total debt thus accumulated has surpassed a record \1,000 trillion (US$10 trillion). Judging from where the nation’s finances stand today, Japan’s future generations are expected to be saddled with a life-time deficit of more than \100 million (US$1 million) per head, including the budget deficit and social security expenditures.

　　　Can we still say honestly that fiscal discipline is maintained in this nation? Kumagai described the situation as “akin to barely hanging by a thread,” noting:

　　　“The government has made a commitment to the international community that it will achieve a primary budget surplus by fiscal 2020. The good thing is that the government has a very strong will to implement fiscal restructuring. In addition, Japan still has enough room left for such measures as increasing the consumption tax.”

Taxes Vary from Country to Country

　　　Public opinion about the consumption tax increase is divided in Japan. In multiple opinion surveys conducted across the nation, those who replied it should be raised next April as scheduled are less than those who replied that it should not. However, about half of all respondents belong to a third category who believe that the tax in question “ought to be raised but the authorities should handle its timing, as well as percentage, flexibly.”

　　　What I suspect the “flexible” faction, which accounts for the majority of the respondents, fears is that a premature hike may cause the inkling of economic recovery seen under the Abe administration to lose momentum. Given that these respondents replied that the tax should be raised but done so “flexibly,” I think it is fair to regard them as being among those who find a tax hike acceptable.

　　　It is such recognizable basic public support for a tax increase, as well as the government’s determination to implement one, that constitute Kumagai’s “thread by which the nation’s fiscal health now hangs.”

　　　Meanwhile, here is how Kumagai explained arrow ③ in Abe’s economic quiver—a growth strategy aimed at stimulating vigorous private investment: “If the Abe administration puts off implementation, a Diet session this autumn would inevitably have to focus on the sales tax, as a new bill needs to be submitted. These deliberations could take anywhere from three to six months. As a result, the fall Diet session could only concentrate on deliberations of a new tax bill, leaving it unable to devote enough time to discuss measures to work out the coveted growth strategy.”

　　　Kumagai was among the leading financial and monetary experts who met on August 27th to speak on whether or not the consumption tax should be raised. Also present was Koichi Hamada, Emeritus Professor of Yale University who serves as an economic advisor to the prime minister. Prof. Hamada, reluctant to back the 3% increase, proposed that the tax be raised gradually, say, by 1% annually. Kumagai brushed aside Hamada’s proposal as an armchair theory that would not work in practical terms, explaining:

　　　“If the administration decides to raise the consumption tax by 1% over time, manufacturers would find it difficult to shift increased production costs to the sale price of their goods, leading to a serious social problem of subcontractors having to bear the brunt―a serious social problem. So I think it would not be such a bad idea to raise the tax by 3% as planned, giving back 2% to the people as a sort of compensation for price increases, so, all told, the tax can in effect be gradually raised by 1% over time, as Professor Hamada proposes.”

　　　To those who point out that increasing the tax by 3% and then “paying back” the people an equivalent of 2% of the tax hike doesn’t make sense, Kumagai had this to say:

　　　“If the government can increase the revenue by some \8 trillion (US$80 billion) by raising the consumption tax, it will constitute a lasting and stable revenue source. On the other hand, business stimulus measures basically can last only a year. So, in the long run, raising the consumption tax will significantly help the government implement financial restructuring.”

　　　Kumagai countered criticism that no nation dares raise taxes by as much as 3% in a single swoop by pointing out that such a view is problematical when compared with the tax schemes of other nations. He explained:

　　　“Member countries of OECD (Organization for Economic Cooperation and Development) levy consumption taxes averaging 20%. Also, no nation can join the European Union unless its consumption tax is higher than 15%. EU nations, which already impose heavy consumption taxes across the board, can only do a little at a time when it comes to raising them. Meanwhile, Japan is starting from just 5%, which is very low to begin with, comparatively speaking. So, it simply is not possible to compare tax situations uniformly.”

　　　Kumagai’s argument that the government should raise the consumption tax is certainly easy to understand. With the same clarity, he stressed the seriousness of the situation in which almost 80 to 90 percent of those involved in the nation’s financial markets are fearful that, unless the tax hike is implemented, Japanese government bonds and stocks will be sold off. What barely sustains the Japanese financial markets today is, first and foremost, the confidence the international community still has in the Japanese government’s strong will to implement financial restructuring and that the Liberal Democratic Party administration headed by Abe is capable of making difficult decisions.

　　　In the unlikely event that Abe should go back on his own commitment of a year ago of raising the consumption tax, his administration will instantly be viewed as no different from the previous Democratic Party of Japan administration, which put off virtually everything under the sun. Then, what is left of the confidence in Japan on the part of the international community will swiftly be lost and the selling off of Japanese government bonds and stocks will ensue on a grand scale, according to Kumagai.

Tough and Lonely Decisions for Abe

　　　At a time when momentum is gaining for support of a tax increase, as seen in the arguments made by Kumagai, Abe shoulders a heavy responsibility to not only make the necessary decision unflinchingly but to move on to enactment in a comprehensive and effective way. Specifically, he must by all means succeed in implementing an enlightened strategy for the nation’s real growth in tandem with the tax hike.

　　　Isao Iijima, special advisor to the prime minister, emphasizes that Abe stands at a crossroads where his true leadership is being tested. Iijima, who claims to have assumed his current post in order to help realize a long-term, stable administration for Abe, attributes the secret of the longevity of the administration headed by Shinichiro Koizumi to his decisiveness. Koizumi served three terms as prime minister from April 2001 to September 2006—unusually long for a recent Japanese prime minister. As he compares Abe and Koizumi pertaining to the most difficult matter of a visit to Yasukuni Shrine, Iijima admits he has yet to draw a conclusion, explaining:

　　　“I know that last December 27th, the day after the Abe cabinet was formed, the prime minister initially had actually intended to visit Yasukuni Shrine. Government offices would be closed on December 28th for the New Year’s holidays, the New Year’s Day would quickly come, and people would be back to work just a few days later. Taking those matters into consideration, I strongly believe Abe should have visited Yasukuni on that day, December 27th, no matter how much fuss was made about the visit. I suspect that the prime minister must have made thorough arrangements with the Yasukuni side, but the projected visit was presumably aborted due to opposition from those around him. Abe may wish to visit the shrine this fall, but I would think any plan to attend the semi-annual autumn observance at Yasukuni would be impractical in view of the large number of important bills pending before the Diet. If Abe is not able to make the hard decisions and follow up to implement them, it will be difficult to expect his administration to last long.”

　　　Iijima believes that those who want Abe to remain in power long support him precisely because they want him to be a prime minister who is capable of grappling squarely with difficult issues requiring tough and lonely decisions—such as the consumption tax hike, a Yasukuni visit, the right to collective self-defense, and a revision of the present constitution. I cannot agree with him more.

(Translated from “Renaissance Japan” column no. 575 in the September 26, 2013 issue of The Weekly Shincho)