"If we raise taxes now, would consumption slump, and would the Japanese economy sink back into the deep valley that is economic morass and deflation? I pondered these questions until the very end."
- Shinzo Abe, Japan's Prime Minister
After months of work, series of reports and plenty of analysts' comments, providing their forecasts and assessment of current situation in the world's third largest economy, Prime Minister Shinzo Abe decided to raise the consumption tax from 5% to 8% in April as it was planned earlier. This decision sweeps aside concerns the hike might put the brakes on the economy's nascent amelioration. At the same time, to buffer against the possible slowdown, Abe also announced a stimulus package of roughly 6 trillion yen, which is expected to pump back into the economy the major part of the 8.1 trillion yen in revenue, which the government projects to raise during the first year of the tax increase. Until Japanese authorities decide to raise the potential growth rate, there is no guarantee that businesses will increase wages and show willingness to increase capital investment, therefore a long-term vision for economic growth is vital.
Simultaneously, Abe called for a cut in the nation's corporate tax rate, to boost the economy from its two-decade long slump. During the press conference, Abe urged the political parties to start negotiations on how to bring the rate down in order to meet global competition. Even as Abe's decisions are a little bit contradictive and may weigh on economic growth, the government has already signal its readiness about fiscal consolidation and its decisiveness to curb the debt back to a more sustainable path.
© Dukascopy Bank SA