Japan's Abe taps experts as he mulls delaying 2nd tax hike

In this March 16, 2016 photo, Japanese Prime Minister Shinzo Abe, second from right, and Nobel laureate economist Joseph Stiglitz, left, take their seats for an economic seminar with other members of his Cabinet at Abe's official residence in Tokyo. The message: no matter how bad the debt, Japan's economy is too weak to withstand another tax hike. All is not well in Abenomics land, the world’s third-largest economy, and Abe is seeking fresh advice from top experts, both foreign and Japanese, on what to do next. (Kazunari Fujikake/Kyodo News via AP) JAPAN OUT, MANDATORY CREDIT (The Associated Press)

TOKYO – The scene: Prime Minister Shinzo Abe, the economy minister and top central banker receiving a lecture from Nobel laureate economist Joseph Stiglitz. The message: No matter how bad the debt, Japan's economy is too weak to withstand another tax hike.

All is not well in the world's third-largest economy, and Abe is seeking fresh advice from top experts, both foreign and Japanese, on what to do next.

Japan's economy initially expanded under a policy mix dubbed "Abenomics" that included monetary easing and fiscal stimulus.

But China's slowdown, weaker than hoped-for growth in other economies and lackluster spending by households and businesses have combined to keep Japan's growth well below forecasts. Cheaper oil prices, meanwhile, has slowed progress toward a 2 percent inflation goal that Abe and his advisers say is needed to revive the "animal spirits" that would get growth back on track.

The economy contracted at a 0.3 percent annual rate in October-December and is forecast to shrink again in the current quarter.

Japan's sales tax was due to rise to 10 percent from 8 percent in October 2015, but that that increase was deferred until April 2017. Now many here are betting that with an election for the upper house of parliament looming, Abe will once again postpone that hike.

"The headwinds that are facing us are far stronger than what the policymakers expected," said Masamichi Adachi of JP Morgan in Tokyo. "You can make an argument that it's a good excuse to change the original plan."

An April 2014 tax hike from 5 percent to 8 percent was an urgent priority to try to rein in Japan's public debt, which has ballooned to more than twice its GDP. But the move led to sharp economic contraction, and despite a barrage of monetary stimulus, the economy has meandered in and out of recession ever since.

Inflation has also remained flat. Core inflation, which excludes volatile food prices, was zero in February, data released Friday showed. Earlier in the week, the government downgraded its assessment of the economy for the first time in five months.

Chief Cabinet Secretary Yoshihide Suga, one of Abe's most powerful allies, says the tax will be raised unless it's clear the hike would hurt the economy so badly that tax revenues would fall.

That's where the economics big guns come in, as Abe seeks advice ahead of the summit of Group of Seven leaders in central Japan in late May.

TV news showed Stiglitz and another Nobel economics laureate, New York Times columnist Paul Krugman, addressing Abe and other top Japanese officials. Both men urged Abe not to raise taxes.

"I'm a great admirer of the policy moves that have been made by Japan, but they are not good enough, and partly because all the rest of us are in trouble as well," Krugman said in comments to Abe and other top officials broadcast by the national TV network NHK.

According to documents posted online, Stiglitz called for boosting demand and countering rising inequality by retraining workers, improving social services networks such as child care and improving oversight of the financial sector.

Since Abe earlier promised to go ahead with the next tax hike unless the global economic outlook is too weak, a pessimistic assessment of the global situation could provide a pretext for another postponement, while deflecting criticism of his own policies and Japan's domestic economic performance.

"If the Japanese economy is not doing well, it's the failure of Abenomics," said Adachi of JPMorgan. The consultations with top foreign experts allow Japanese leaders to say: "our policy is working and it's the fault of the severe global environment."

However, he notes, if Abe delays the tax hike he likely will call a snap general election, just as he did in late 2014. That's not an easy choice for the head of a ruling coalition that holds a two-thirds majority in the powerful lower house of parliament.

Economist Tomo Kinoshita of Nomura Securities Co. puts the likelihood of a delay at 40 percent.

"It's not the main scenario, but the possibility of a delay is growing," he said.

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