Written on May 7, 2019, this essay criticizes the fundamental error of Japan’s Heisei-era economic policy, namely raising the consumption tax under deflationary pressure, and argues that in the Reiwa era Japan should openly declare a freeze on tax hikes and devote itself to economic recovery.
Drawing on Hideo Tamura’s argument, it examines debates surrounding the GDP deflator, OECD projections, government debt, and the Bank of Japan’s Tankan survey, and points to the serious damage done to the Japanese economy by the tax-hike line led by the Ministry of Finance.

2019-05-07
Economic policy that uses that as its standard is likewise lacking in principle, and it brings confusion to the actual field.
Prime Minister Abe need only declare openly and squarely that he will avoid a consumption tax hike while deflation continues, and devote himself to the revival of the Japanese economy.

Hideo Tamura, the Sankei Shimbun’s economic affairs reporter, stands out among the so-called economic commentators, most of whom do nothing more than brandish hand-me-down economic theories from the Ministry of Finance.
Unusually, through the natural study and discipline expected of a reporter, he has continued day after day to conduct examinations that do not lose to those of so-called scholars, and has continued magnificently to present correct economic theory.
He is now one of Japan’s treasures in the economic world, possessing insight equal to that of Nobel Prize-winning economists.
The Prime Minister should boldly declare a freeze on tax hikes.
It is precisely in Reiwa that we must return to the royal road of economic policy.
The Reiwa era has begun.
We want to change the ultra-low economic growth mode of the Heisei era, stuck in the zero-percent range, but clumsy secret plans are unnecessary.
We need only return to the royal road of economic policy.
Heisei-era economic policy was one in which absurdity had become routine.
The representative example is the raising of the consumption tax under deflationary pressure.
In fiscal 1997, although for two consecutive years the GDP deflator, that is, the inflation rate for the real economy as a whole, had remained negative due to the aftereffects of the collapse of the bubble economy, the Ryutaro Hashimoto administration raised the consumption tax rate from 3 percent to 5 percent and imposed a burden on households.
A consumption tax increase causes household consumption, which accounts for 60 percent of GDP, to shrink.
As a result, deflation became chronic in the Japanese economy.
Deflation refers to a state in which prices continue to fall, but what is painful for workers and child-raising generations is that income levels continue to fall by more than the drop in prices.
Unmarried men whose annual incomes are below average hesitate to marry because of anxiety about the future.
The Yoshihiko Noda administration of the former Democratic Party, whose understanding of deflation was weak, stepped into the three-party agreement, precisely as Finance Ministry bureaucrats had prepared it, involving the LDP and Komeito in a two-stage rise in the consumption tax.
Although the second Shinzo Abe administration was supposed to have championed “escaping deflation,” it raised the consumption tax rate to 8 percent in fiscal 2014 exactly in accordance with the three-party agreement.
The result was, as expected, a rise in deflationary pressure.
Prime Minister Abe, feeling a sense of crisis, twice postponed the increase to 10 percent, but has repeatedly declared that it will be implemented as scheduled on October 1 of this year.
He was driven by the political motive of using part of the increased tax revenue from the consumption tax hike as funding for child-rearing and education support.
The majority in various fields say that the tax increase is for improving the fiscal balance and securing the financial resources for social security, and do not first concern themselves with its deflationary effect.
They continue to say that the negative effect on the economy is only temporary, and can be offset by a temporary expansion of fiscal spending through supplementary budgets and the like.
But such stopgap fiscal mobilization lacks continuity and predictability in projects, has nothing to do with sustained growth, and only swells the debt.
It wastes precious tax money.
It does not deserve to be called economic policy.
And yet, throughout the Heisei era, the same thing was repeated.
What was the outcome?
This graph is based on economic outlook data from the Organisation for Economic Co-operation and Development (OECD, headquartered in Paris), which is called the world’s largest think tank.
Since fiscal 1997, Japan’s real economic growth rate has remained in the zero-point-something-percent range, and the ratio of government debt to GDP has not decreased but has continued to rise.
The outlook extends through Reiwa 2 (2020), and already incorporates the implementation of a 10 percent consumption tax.
Growth remains downward-looking as ever, and government debt worsens still further.
Moreover, Japan’s growth rate occupies the habitual bottom place among OECD member countries, including the United States, Europe, South Korea, and some emerging countries.
The opening of Reiwa is deeply precarious indeed.
Just imagine: if the growth-rate gap with emerging countries continues, in the future Japan’s young people may find themselves having to seek jobs in China or South Korea.
Unworthy though I am, my own argument has consistently remained the only anti-tax-increase position among the national newspapers.
Even when I prove with data that a consumption tax increase benefits the national economy in not a single respect other than strengthening the authority of bureaucrats beginning with the Ministry of Finance, the people around me still respond, “But after all, a consumption tax increase cannot be avoided.”
This is a terrifying “atmosphere.”
The OECD is no different.
Armed with the above economic outlook, OECD Secretary-General Gurría, who came to Japan in mid-April, recommended to Japan that it raise the consumption tax rate as high as 26 percent.
Mr. Gurría is a man who, during his time as Mexico’s finance minister, carried out thorough austerity policies in that country after it had fallen into external debt default due to profligate public finance, was highly praised by international financial circles, and was then selected to head the OECD.
That he should offer to Japan, the world’s largest creditor nation, serious-minded and averse to profligacy, the methods of Mexico is laughable, but incomprehensibly the media received it obediently, as in “Fiscal soundness may require a 26 percent consumption tax” (Asahi Shimbun Digital, April 15).
In Japan, the outrageous argument that a major tax increase should be carried out amid deflation and zero-percent growth passes through without any resistance.
Risk-averse bureaucrats in international organizations merely follow along with that.
At long last, cautious opinions have finally begun to appear around Prime Minister Abe concerning the consumption tax increase.
On April 18, LDP Acting Secretary-General Koichi Hagiuda suggested postponing the tax hike, saying, “The economy is declining a little.
If the June Tankan survey by the Bank of Japan makes it look dangerous ahead, we cannot take everyone toward a cliff.
A different development is possible.”
But the BOJ Tankan is nothing more than a momentary forecast at a single point in time.
Economic policy that uses that as its standard is likewise lacking in principle, and it brings confusion to the actual field.
Prime Minister Abe need only declare openly and squarely that he will avoid a consumption tax hike while deflation continues, and devote himself to the revival of the Japanese economy.