Take coronavirus, add a trade war and raise taxes

One of the world’s most pivotal economies is reeling from a self-induced policy mistake. Japan is now paying the price for last quarter’s consumption-tax hike, just as it begins to wrestle with the impact of the coronavirus.
Japan’s gross domestic product tanked 6.3% in the final three months of 2019, the Cabinet Office said, almost twice the drop economists anticipated and the worst result in five years. There’s a good chance Japan will fall into recession, given how much the virus has already curtailed activity this year.
This fiasco was all so unnecessary. There’s never a good time to raise taxes, and Japan’s aging population is straining its fiscal base. That said, Prime Minister Shinzo Abe was warned in the months leading up to the October 1 hike that the economy would take a hit. (I wrote a year ago about the folly of going forward.) The increase to 10% from 8% had already been delayed twice.
The last time the levy was raised, Japan fell into a deep slump. Fearful of repeating that mistake, Abe granted an array of exemptions and sweeteners to no avail: The latest hit came close to the 7.4% dip in the second quarter of 2014.
Abe’s error would be bad enough if this were Japan’s only tragedy. We’re seeing the effects of China’s shutdown ripple across the globe as the coronavirus spreads. Singapore, a hub for global capital, trade and tourism, said the economy may not grow at all in 2020, issuing a new forecast that estimates growth of -0.5% to 1.5% — a sober prediction less than two months into the year. Thailand, a major Chinese tourist destination, sliced its outlook to a range of 1.5% to 2.5% from 2.7% to 3.7%. Even Germany’s fourth-quarter stagnation — figures have showed zero growth — look hale by comparison.
These dismal figures are starting to look like a down payment on an even bleaker future. Capital Economics expects no global expansion in the first quarter, a pattern we haven’t seen since 2009. This is all even more tragic given the world economy appeared to have bottomed after a year spent wrestling with the US-China trade war.
Was it really necessary to proceed with this hike when Japan was buffeted by a dispute between its two biggest trading partners? No doubt the Ministry of Finance, long a fan of tax increases, pushed it through: First among equals in the Tokyo bureaucracy, the agency’s alumni are spread through many institutions of economic and corporate life, making its influence pervasive.
In retrospect, it may have been better to implement the tax increase in more modest increments of, say, 0.5% every year. Those gradual step-ups could have been made contingent on economic forecasts: If growth was projected to slip below a certain level, the tax changes would be deferred, while if the prognosis brightened, then a slightly bigger increase could be implemented.
Nobody could have seen a global epidemic on the horizon as last year drew to a close. But so much had to go right for Japan to dodge this tax-hike bullet. Instead, something big has gone wrong. When the virus bill comes due, the price will be higher, thanks to Japan’s missteps.

—Bloomberg