11 Dec 2014
Tax hike runs counter to spirit of Abenomics – Nomura
FXStreet (Barcelona) - Richard Koo, Chief Economist at Nomura, notes that critics feel a tax hike delay decision might cast doubts for the rest of Abenomics, as its goal to remove the two-decade economic slump ran counter after the first rate hike.
Key Quotes
“Some critics said a decision to delay the tax hike would cast doubts on the outlook for the rest of Abenomics. Here, however, we should keep in mind that the tax increase was decided by Mr. Abe’s predecessor and was not part of Abenomics.”
“In as much as the goal of Abenomics’ three arrows is to end Japan’s two-decades-long economic slump and place the economy on a new growth trajectory, the consumption tax hike, which was agreed upon before Mr. Abe became prime minister, ran counter to the spirit of Abenomics from the outset.”
“However, the policy culture in Japan is not to abandon policies that have been approved, and Mr. Abe unfortunately decided to go ahead with the first tax hike in April 2014. The economic contraction that followed cast a long shadow over views of the Japanese economy both inside and outside the country.”
“We should remember that it is not easy to reinvigorate an economy once it has lost momentum. The last time an increase in the consumption tax caused the economy to stall, in 1997, it took more than two years of massive fiscal stimulus to bring the economy back to life.”
“IMF Managing Director Christine Lagarde advised Japan to go ahead with the second consumption tax hike in October 2015 and said any resulting economic weakness could be dealt with using fiscal stimulus. However, the tax hike this April has already necessitated such a response.”
“The focus now should be on what policy the post-election government places at the center of its efforts to restore economic momentum. After all, there are not many policy options with the potential to revive the broader economy.”
Key Quotes
“Some critics said a decision to delay the tax hike would cast doubts on the outlook for the rest of Abenomics. Here, however, we should keep in mind that the tax increase was decided by Mr. Abe’s predecessor and was not part of Abenomics.”
“In as much as the goal of Abenomics’ three arrows is to end Japan’s two-decades-long economic slump and place the economy on a new growth trajectory, the consumption tax hike, which was agreed upon before Mr. Abe became prime minister, ran counter to the spirit of Abenomics from the outset.”
“However, the policy culture in Japan is not to abandon policies that have been approved, and Mr. Abe unfortunately decided to go ahead with the first tax hike in April 2014. The economic contraction that followed cast a long shadow over views of the Japanese economy both inside and outside the country.”
“We should remember that it is not easy to reinvigorate an economy once it has lost momentum. The last time an increase in the consumption tax caused the economy to stall, in 1997, it took more than two years of massive fiscal stimulus to bring the economy back to life.”
“IMF Managing Director Christine Lagarde advised Japan to go ahead with the second consumption tax hike in October 2015 and said any resulting economic weakness could be dealt with using fiscal stimulus. However, the tax hike this April has already necessitated such a response.”
“The focus now should be on what policy the post-election government places at the center of its efforts to restore economic momentum. After all, there are not many policy options with the potential to revive the broader economy.”