November 2, 2014 / 8:43 AM / 3 years ago

Wounded Japan PM grapples with tax jinx after BOJ eases

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

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.

But since a September cabinet reshuffle meant to boost his ratings, two ministers have quit over funding-related misdeeds, others face scrutiny and talk persists about fresh disclosures.

To be sure, the scandals themselves have not sent Abe’s ratings plunging. Support remains around 50 percent, although some polls showed it falling to slightly below that for the first time since July, when Abe’s cabinet took the controversial step of easing constitutional constraints on the military.

But the scandals coincide with growing concerns about Japan’s long-sought economic recovery after the 3-point rise in the sales tax to 8 percent in April pushed the economy into its deepest quarterly slump since the 2009 global financial crisis.

“I don’t think the scandals are doing all that much damage,” said a ruling Liberal Democratic Party lawmaker who declined to be identified so he could speak freely. “The problem is the economy.”

TRIPLE MOVES, ELECTION CALENDAR

Abe has already faced pressure from some aides, including architects of Abenomics, to delay the tax rise.

Implicitly admitting that not all was going according to plan, the BOJ said on Friday it would accelerate its purchases of Japanese government bonds, even as the government signaled a willingness to boost fiscal spending if needed and the government pension fund announced it would buy more shares.

The moves pushed Tokyo share prices, closely watched by Abe as a barometer of economic sentiment, up more than 5 percent. But how much the actions will impress voters, especially those in regions feeling neglected by Abenomics, is unclear.

Despite the scandals and economic doubts, there is little talk that Abe’s grip on his own job is in immediate danger.

The LDP trounced the main opposition Democratic Party of Japan in the 2012 election, and the opposition has been in disarray since. Strong rivals are scarce inside Abe’s own party.

“As the economy slows, hopes for Abe are declining but there is little sense among the public that Abe should be dumped because there is no viable alternative either inside or outside the LDP,” said veteran political analyst Minoru Morita.

But much of Abe’s voter support rests on hopes he can lead the world’s third-biggest economy back to sustainable growth, so signs that isn’t happening are likely to erode his ratings.

“Abenomics is nearing its ‘sell-by’ date,” said LDP lawmaker Seiichiro Murakami, a rare outspoken critic of Abe’s policies in the party. “People are watching carefully and gradually coming to realize that Abenomics was nothing.”

Public support could prove less robust than it looks at first glance. A recent Nikkei newspaper poll put support for the LDP at 37 percent, far outstripping that for the Democrats at 6 percent - but 45 percent supported no particular party at all.

In addition, many voters oppose not only a second sales tax hike but other key policies, such as restarts of atomic reactors that went offline after the 2011 Fukushima nuclear disaster.

“People are waiting for Abenomics to work .. but at some point, the fact that there are discrepancies between (support for) major policies and government approval ratings will catch up,” said Tobias Harris at risk consultancy Teneo Intelligence.

Complicating the situation are local elections later this year and nationwide next spring that will serve as gauge of public opinion ahead of a LDP leadership poll next September that Abe must win to secure another three-year term.

Fears that his popularity has peaked could, some Japanese media have said, encourage Abe to combine a postponement of the sales tax rise with a snap election late this year or early next, although no lower house poll need be held until late 2016.

Abe is expected to wait for final data on third quarter gross domestic product, due out on Dec. 8, before deciding on the tax rise, but preliminary data will be released in mid-November.

Several experts dismissed the early election scenario, but some political insiders said it couldn’t be ruled out.

“I think there could be an election in the near future,” the LDP lawmaker said. “Abe could decide to postpone the sales tax hike after looking at data due out Nov. 17 and call an election, saying he is putting the economy first.”

Writing by Linda Sieg; Editing by Alex Richardson

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