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Abe may delay hike in consumption tax rate if economy stagnates

epa05117825 Japanese Prime Minister Shinzo Abe walks past Economy and Fiscal Policy Minister Akira Amari (L) during a plenary session of the Lower House at parliament in Tokyo, Japan, 22 January 2016. Amari told on 22 January 2016 he will explain in a week on allegations which he received money from a construction company to do favors, a Japanese weekly magazine reported 21 January.  EPA/KIMIMASA MAYAMA

Tokyo / DPA

Prime Minister Shinzo Abe is considering delaying an increase in the consumption tax rate if the economy remains stuck in low gear, due to concerns the hike could hurt the economy more than initial forecast as the global economy slows down.
Abe will make a final decision around the time Japan hosts the Group of Seven major economies at the Ise-Shima summit on May 26 and 27.
The rate is scheduled to be raised from 8 per cent to 10 per cent in April 2017. If Abe postpones the increase, he is also looking at the bold step of dissolving the House of Representatives and holding elections for both Diet chambers on July 10.
Abe is reportedly considering a delay of one to two years for the tax hike. He anticipates the necessary legal revisions will be made during the extraordinary Diet session due to start in autumn.
Abe had indicated he would consider freezing the tax hike if a major contingency happened, such as a significant natural disaster or an economic downturn such as the one precipitated by the Lehman Brothers bankruptcy. Now he has widened his options and is prepared to include a deterioration of the global economy as grounds for delaying the increase.
Abe will make his decision based on factors including preliminary figures for Japan’s gross domestic product for the January-March quarter, which will be announced in May, and what unfolds at a meeting of G-7 finance ministers and central bank governors on May 20 and 21 and the Ise-Shima summit.
On Wednesday, the first of a series of international financial and economic analysis meetings was held at the Prime Minister’s Office. Experts taking part in the meeting called on the government to postpone the tax increase and stimulate aggregate demand.
“After the tax rate was increased to 8 percent (in 2014), it became obvious that the economy takes time to recover from the hike,” a government source said. “If we increase the tax but tax revenue falls, there’s no point in doing it.”
Many opposition parties oppose jacking up the tax rate, so postponing the hike could have another advantage for the government. “If we delay the hike, it could be removed from the points of contention in this summer’s House of Councillors election,” a lawmaker close to the prime minister said.
The prime minister would also have more options over the timing for dissolving the lower house. The most likely scenario is holding elections for the upper and lower chambers on the same day. The opposition parties are prepared to run a single candidate against ruling parties’ candidates in several upper house constituencies. If elections for both houses were held simultaneously, the opposition parties might run their own candidates.
Abe feels this scenario would help boost the ruling parties’ number of seats in the upper house and make it easier to move ahead with constitutional amendments.
If elections for both houses are held on the same day, the likeliest plan would be to dissolve the lower house at the end of the Diet session on June 1, announce the election on June 28 and hold voting on July 10 along with voting in the upper house election. Upper house election campaigns conventionally run for 17 days, but the government will avoid announcing the election on June 23, which is the day Okinawa Prefecture commemorates the end of the Battle of Okinawa during World War II. Instead, the election likely will be announced sometime from June 20 to June 22. If the government opts for this schedule, the election would be held after the minimum voting age has been lowered, so people aged 18 and above would be able to cast votes.
However, some observers believe Abe will need to realise reform of the electoral system before the lower house poll if he wants to hold both elections on the same day. The ruling parties are eager to avoid a situation in which the Supreme Court could rule an election is unconstitutional due to disparities in the value of votes between different constituencies, so this issue looks set to become the focus of discussions between the Liberal Democratic Party and its junior coalition partner, Komeito.

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