Wounded Japan PM grapples with tax jinx after BOJ eases

Sun Nov 2, 2014 2:40am EST
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By Linda Sieg and Tetsushi Kajimoto

TOKYO (Reuters) - When Prime Minister Shinzo Abe raised Japan's sales tax from April, he was betting he could break a jinx that has doomed leaders who raised the levy to losing their jobs.

Now, wounded by cabinet scandals and growing doubts about his radical "Abenomics" prescription to revive an economy scarred by years of deflation, Abe must decide whether to roll the dice again.

A shock move by the Bank of Japan on Friday to expand its massive asset-buying stimulus program - in the hope it will stoke inflation - could boost the chances of a rise in the unpopular levy from October, especially if followed by promises of added fiscal stimulus to help offset the pain.

But concerns that his popularity has peaked and worries about the election calendar are certain to weigh as heavily as economic data when Abe decides in coming weeks whether to press ahead with a planned rise to 10 percent.

"The government is indicating it is focusing on the economy ... but the truth is that after all, Abe will weigh political loss and gain in making a final decision," said Hiroshi Watanabe, a senior economist at SMBC Nikko Securities.

Raising the sales tax requires a strong nerve and reserves of political capital - the issue has been regarded as the "third rail" of Japanese politics ever since it was first promoted in 1979, and a previous increase in 1997 was blamed by many for killing an incipient recovery.

So for proponents of the hike, who argue it is vital to curb Japan's huge public debt and fear delay would trigger a sell-off in government bonds and a spike in long-term interest rates, the timing for a decision is hardly auspicious.

For 20 months after taking power with pledges to reboot Japan's economy with a mix of hyper-easy monetary policy, spending and reform, Abe's team was mostly unscathed by the scandals that dogged his first, troubled term from 2006 to 2007.   Continued...

Japan's Prime Minister Shinzo Abe attends the Japan Self-Defense Force (JSDF) Air Review to celebrate 60 years since the service's founding at Hyakuri air base in Omitama, northeast of Tokyo October 26, 2014. REUTERS/Toru Hanai