Japan: Tax hike II (post-2012, LDP/Abe)

Proposal

Following the election of the Abe government in December 2012, the implementation of the tax hike bill that had been passed by the previous government now became the responsibility of the incoming administration. In particular, the question that the Abe government needed to answer was when the tax increase should take place. On 1 October 2013, PM Abe confirmed that his government would increase the sales tax by 3% in April 2014 (Yomiuri Shinbun, 1 October 2013, p.1), and a further 2% increase which was scheduled for October 2015 (Yomiuri Shinbun, 23 September 2013, p.2).  PM Abe first promised that the tax hike would be implemented on the condition of the improvement of economic situation. PM Abe also promised to use the increased revenue from the tax hike for social welfare. However, Jichiroren claims that increased revenues were used for large-scale public works and to compensate the reduced corporate tax (Jichiroren April 1, 2014). Indeed, according to the report issued by Ministry of Finance, in the FY 2015 budget, over 1.6 trillion yen was gained from the tax hike, but the expected spending on social welfare has only increased by 582 billion yen from the previous year (Ministry of Finance 2015).

Severity: as with our discussion of the initial proposal for the Tax Hike under the DPJ, we consider the fact that this is a doubling of the sales tax to be sufficient for it to be considered high in terms of severity.

Severity: high

Target: similarly, as with our discussion of the initial proposal for the Tax Hike under the DPJ, as the measure increases the flat-rate consumption tax, we view it as a targeted and regressive measure that will have a disproportionate impact upon those with lower incomes. We therefore view it as regressive and therefore categorise it as targeted on ‘outsiders’.

Targetoutsiders (regressive)

Refusal

The proposed two-stage tax hike prompted large-scale opposition against the Abe administration – from a range of opponents, including within the LDP party, as well as from business groups, trade unions and citizens groups.

Imperceptible resistance

The most obvious form of imperceptible resistance took the form of tax evasion following the implementation of the hike. For instance, a number of managers of small-and medium-sized businesses were alleged to have failed to pay the increased sales taxes (Asahi Shinbun June 11, 2015, p.27). As an example, estimates of newly identified incidences of non-payment of sales tax rose in one region (Shikoku) by 19.4 % in the first tax year following the introduction of the first stage of the tax hike (2014-15) (Asahi Shinbun, August 14, 2015, Asahi Shinbun, September 25, 2014, p.25).

We might further consider an additional form of imperceptible dissent to be the changing patterns of consumption that were prompted. That is, reduced levels of consumption  (Asahi Shinbun, December 4, 2014, p.25) or heightened attemts to reduce expenditure (by c. 70% of households) (Roudou Souken 2014 July/August, p.20) – especially amongst the lower-income households (Roudou Souken 2014 July/August, p.19). Whilst this is obviously difficult to categorise as a form of resistance, it did nevertheless represent an attempt to circumvent the impact of the increased tax rate – and also produced considerable decline in consumption and GDP than had been anticipated. In that sense, it is associated with the unintended consequences discussed below.  Finally, as another form of imperceptible dissent, the tax hike also resulted in consumers bringing forward spending in order to avoid the tax hike; resulting in a sharper post-hike decline in spending than the government had anticipated and pushing the economy into recession in the second quarter of 2014.

Given the combination of these different aspects of a range of imperceptible, or everday, forms of dissent, we consider these in total to amount to a substantial degree of refusal.

Public opposition

The tax hike also faced considerable opposition from trade unions, citizens’ groups, and NPOs. This reflected a low level of popular support for the measure, with 69% of those surveyed opposing the sales tax hike (Asahi Shinbun, December 4, 2014, p.25).

Large-scale protest events were conducted across Japan, including a Kenrouren-led demonstration in Yamaguchi (Asahi Shinbun, September, 25, 2014, p.33), Chiba (September 25, 2014, p.25), Yamaguchi (August, 26, 2014, p.36), and in Kanazawa a protest of 120 people was observed (Asahi Shinbun, April, 2, 2014, p.29).

Some unions protested against the tax hike as part of their annual May Day protest events. Opponents focused on the impact that the tax hike would have on the poor, and on the health of the national economy (which it was feared would experience a drop in demand). Those events were conducted across the country in May 2013 and 2014. For instance, in Yoyogi Park in Tokyo, Zenroren conducted a May Day protest event whereby 21,000 people joined a rally and street protest (Jiji Tsushin, May 1, 2013). In Fukushima, 3,000 people (Asahi Shinbun, April 27, 2014), in Osaka, 46,000 people in total (Asahi Shinbun May 1, 2014, p.7), Fukui city, 1,000 people in total (Asahi Shinbun, May 2, 2014, p.23), in Shiga 350 people (Asahi Shinbun, May 2, 2014, p.25) rallied and protested against the tax hike. Similarly, a May Day event was held in Nagano, conducted by Rengo Nagano and Kenrouren, where 43,000 joined in Rengo Nagano’s May Day, protesting against Abenomics which they claim that it make workers’ life insecure. Kenrouren’s May Day protest witnessed 1,500 workers, claiming that Abenomics endangers workers’ life and employment (May 2, 2014, 2014, p.21).  These May Day protest events were also witnessed the following year, May 2015. The number of protest and rallies against the sales tax increased in Tokushima (Asahi Shinbun, May 2, 2015, p.28). About 1,000 protesters gathered under the May Day event 1 May 2015, criticizing the government  on that grounds that people’s life was endangered due to inflation and sales tax hike and a deterioration of social welfare.

Closely related to these protest events, some unions appealed to companies to raise wages in their collective wage bargaining in an attempt to compensate for the tax increase (Spring wage offensive, Shunto) (Asahi Shinbun January 29, 2015).

Furthermore, there has been Political parties, unions, and citizens’ groups such as Social Democratic Party, Hodanren (the National union association of Insurance and Medicare) and Jichiroren had issued their official letters to PM Abe, expressing that they strongly oppose the tax hike.

public opposition (non-disruptive): substantial

Obstacles

As a result of the first phase of the sales tax hike in April 2014 (to 8%), private consumption declined by 3.1 % on an annual basis – greater than the 1% decline at the time of the previous 1997 sales tax hike from 3 to 5% (which it often compared with, and which is commonly viewed as having had a considerable detrimental effect upon the Japanese economy) (Asahi Shinbun, August 15, 2015, p.11, White Paper on Economy and Finance 2015). This had a subsequent effect upon business. For instance, AEON in the retail sector had to reduce prices of 100 items to cope with the large-scale decline in sales after the implementation of VAT tax (August, 14, 2014, p.3). The introduction of the tax increase also resulted in a sharp increase in demand by 2.0% between January 2013 and March 2013, just ahead of the introduction of the tax increase, followed by a sharp decline in public consumption of 4-5% between April and June 2014 after the increase had been introduced (Asahi Shinbun, August, 14, 2014, p.3).  Moreover, there was a reduction in sales in supermarket stores in Japan by 1.7% compared to the same month in previous year and this decrease in sales continued for 10 months since the introduction of sales tax increase (Asahi Shinbun, February 24, 2015). As a result of these developments, the IMF revised Japan’s real economy growth rate downwards by 0.3% to  a prediction of 1.4% annual growth (April 9, 2014, p.9). This was exceeded, with GDP declining by 1.6% between July and September 2014, shocking the Japanese market. (Asahi Shinbun, November 18, 2014, p.2, Asahi Shinbun, December 1, 2014). This was therefore a range of considerable unintended (indirect) consequences.

The tax increase and subsequent economic impact also had a damaging effect upon the popularity of the Abe administration and confidence in its economic policies – witnessing public opinion shift from 62% in support of the government’s economic policies in May 2013, to only 25% of respondents believing that Abenomics will improve the economy in October 2015 (Nihon Keizai Shinbun 27 May 2013; Nihon Keizai Shinbun, October 25, 2015). These also represent moderate governing problems, in that they have led to Abenomics facing difficulties achieving its stated goal of a return to sustained growth- these are only considered moderate governing problems, however, as the Abe administration still shows no visible signs of being on the verge of being voted out of office.

Obstacles:
indirect (unintended consequences – sharp dip in growth)
governing problems, moderate

Response

Modify – concessions

Throughout the implementation of the sales tax hike there has been consistent pressure to introduce concessions to offset its effects.

Ahead of the first tax rise, Abe introduced a small 10,000 yen increase in social benefits for low-income people in order to offset the effect of the tax hike. However, he also rejected proposals to include countervailing tax measures that would have reduced the impact of the tax, and deferred a decision on tax deductions ahead of the second-stage of the tax increase until a later date (Asahi Shinbun, January 20, 2013).

Ahead of the second tax rise, a number of concessions were introduced.

First, the Abe administration introduced a “temporary welfare benefit” initiative – 6,000 yen for the low-income people to alleviate their pain after the introduction of sales tax hike (Ministry of Health, Labor and Welfare (MHLW) 2015). This money was distributed to 24 million people (Asahi Shinbun, December, 20, 2014, p.1, Asahi Shinbun, April 4, 2014, p.5).

Second, the government introduced temporary child benefit (3,000 yen per child) for households with children under 11 years old (MHLW 2015). This was agreed between the DPJ, LDP, and Komei Party at the time that they agreed to increase sales taxes in 2012 (2014, p.1, Asahi Shinbun, April 4, 2014, p.5).

Third, on 18 November 2014, Abe announced his decision to postpone the second sales tax increase for one and a half years, until April 2017 (Prime Minister of Japan and his Cabinet November 18, 2014, Asahi Shinbun, November 19, 2014, p.1).

Fourth, Abe promised that no further increase in sales taxes would occur before 2020 (Asahi Shinbun, March 14, 2015).

Fifth, following the dip in growth which happened after the introduction of the first sales tax increase, Abe introduced a supplementary budget, which sought to stimulate individual consumption and local economies (Prime Minister of Japan and his Cabinet November 18, 2014).

Sixth, in September 2015, the Abe government introduced a sales tax relief plan. Under the plan, ‘consumers would be able to apply online for a 2 per cent rebate on essential purchases such as food, according to officials at the Ministry of Finance’.

Seventh, in November 2015 the Abe administration further announced that it would provide 30,000 yen to about 10 million low-income pensioners (Yomiuri Shinbun, November 25, 2015, p.2). This will be included as a supplementary budget for the FY2015.

Concessions: in sum, we consider this range of concessions to be substantial. They are many in number, and combined they represent a significant attempt to offset the effects of the tax hike (and indeed to postpone for a considerable amount of time the implementation of the second stage of the tax rise).

Concessionssubstantial

Outcome

Went ahead?

First stage of tax hike (5-8%) – yes.

Second stage – postponed for 18 months, to 2017 (announced 18 November 2014)

Consequences?

Of first stage rise – Fall in private consumption (3.1 % drop compared to the previous year, which is larger than 1.0% decline in 1997 of sales tax hike from 3 to 5% (Asahi Shinbun, August 15, 2015, p.11, White Paper on Economy and Finance 2015)). GDP decline by 1.6% between July and September 2014 (Asahi Shinbun, November 18, 2014, p.2, Asahi Shinbun, December 1, 2014).

We consider these consequences to be moderate, in that they have had an impact upon Japanese growth, but they were not entirely unforseeable and the Abe administration remains in office without any significant challenge to its ability to govern.

 

Sum: in sum, the sales tax hike under Abe (Tax Hike II) experienced a number of obstacles (moderate- decline in tay payments, dip in spending, associated governing problems) and moderate consequences (drop in GDP), as well as being accompanied by substantial concesssions. As such, we consider it experienced a slightly patchy, problematic and limited adoption (1+1+4=6).