Published on July 18, 2019.
This article introduces Sankei Shimbun commentator Tamura Hideo’s criticism of the consumption tax hike, discussing the former Democratic Party administration, the Ministry of Finance, the Bank of Japan, Abenomics, and deflationary recession, while warning of the danger that a higher consumption tax poses to Japan’s economy.

July 18, 2019.
A cautious view was voiced within the ministry, saying, “Even in Europe, such a large increase is avoided out of concern for its Cai impact on the economy, and increases are kept to small increments,” but senior officials dismissed it, saying, “Now, under the Democratic Party administration, is a once-in-a-thousand-years opportunity.”
The essays by Tamura Hideo and Sakai Nobuhiko, including the editorials, proved that Sankei Shimbun is now the highest-quality paper in Japan.
I will introduce to those who do not subscribe to Sankei Shimbun an essay by Tamura Hideo, whom I have mentioned many times, one of the few genuine economic journalists who has an economic theory that is not merely a parroting of the Ministry of Finance.
Inviting it in!?…The Nightmare of Deflation.
An Irresponsible Diet That Lets the Consumption Tax Hike Pass Through.
The current ordinary session of the Diet has been devoted entirely to pursuing statistical irregularities at the Ministry of Health, Labour and Welfare caused by minor bureaucrats, while the consumption tax rate increase from October, which will affect the national economy, has been neglected.
Although the consumption tax hike may invite the nightmare of deflation, is it not an abdication of responsibility in national politics that there is no serious debate?
Speaking of a “nightmare,” Prime Minister Abe Shinzo labeled the former Democratic Party administration as such at the recent Liberal Democratic Party convention.
In his earlier policy speech to the Diet, the Prime Minister clearly stated that “the deflationary mindset is about to be dispelled.”
The Prime Minister probably wanted to show off that, with the greatest nightmare of the Democratic Party administration era for the people being the deflationary recession, Abenomics was overcoming the deflation latrine.
According to the news, in response to the rise in labor costs and logistics costs, price increases are scheduled from this spring onward for milk, yogurt, cup noodles, highway bus fares, and other items; the definition of deflation in economics textbooks is that prices generally and continuously decline, but that does not necessarily fit people’s actual sense of life.
Even if prices are rising, if wage increases do not keep up, something called deflationary pressure emerges.
Because people’s household finances are not in good condition, consumer demand declines.
Companies forced to keep sales prices low become reluctant to raise wages.
In this way, prices turn downward, and wages are dragged down with them.
That is the true nature of deflation.
If it becomes entangled, wages fall more than prices.
What deliberately exposes people’s lives to deflationary pressure is a consumption tax hike.
It covers all goods and services at once with a tax increase.
In fiscal 1997, when the Hashimoto Ryutaro administration raised the consumption tax rate from 3 percent to 5 percent, prices were forcibly raised, but growth in nominal gross domestic product (GDP) stopped.
After that, Japan fell into a long-term trend in which nominal GDP shrank faster than prices declined.
As stated above,
after the consumption tax hike, industry as a whole began reducing wages and employment, and a vicious cycle occurred in which a general decline in prices and a decrease in income for the entire population proceeded simultaneously.
Look at the graph.
It compares the year-on-year rates of increase and decrease since 2009, when the former Democratic Party administration was launched, in nominal GDP, the GDP deflator, which is the price index for the whole of GDP, and the Bank of Japan’s supply of funds, the “monetary base.”
Under the former Democratic Party administration, while Japan could not escape deflation after the Lehman Shock, when it encountered the Great East Japan Earthquake in March 2011, both GDP and prices fell into negative territory.
Thinking back, the former Democratic Party administration was certainly inaction itself.
At the beginning of 2010, the author, together with the late economist Shishido Shuntaro, Professor Emeritus at the University of Tsukuba, and others, met directly with Prime Minister Hatoyama Yukio of the former Democratic Party, which had seized power, and advised him to adopt quantitative expansion policies not only in fiscal policy but also in monetary policy.
Hatoyama listened while rolling his large eyes, and agreed, saying, “Yes, monetary easing is important.”
However, the Bank of Japan still did not move at all.
Some time later, when I happened to meet former Prime Minister Hatoyama in a Diet meeting room and questioned him, he replied lightly, “I conveyed it to the Bank of Japan through the Chief Cabinet Secretary, but they refused.”
Bank of Japan Governor Shirakawa Masaaki at the time was like the embodiment of “BOJ theory,” which says that deflation cannot be corrected by monetary policy.
The increase in the supply of funds by the Shirakawa Bank of Japan after the Great East Japan Earthquake lasted only briefly; it returned to tightening by withdrawing funds and intensified deflation.
Finance Ministry bureaucrats used the naïve former Demicratic Party administration as a stepping stone for a major consumption tax increase.
Prime Minister Noda Yoshihiko at the time did as he was told and concluded a three-party agreement among the former Democratic Party, the Liberal Democratic Party, and Komeito toward a consumption tax increase.
The content was to raise the tax rate in two stages, by 3 percent and then by 2 percent.
Within the ministry, a cautious view was voiced, saying, “Even in Europe, such a large increase is avoided out of concern for its Cai impact on the economy, and increases are kept to small increments,” but senior officials dismissed it, saying, “Now, under the Democratic Party administration, is a once-in-a-thousand-years opportunity.”
The former Democratic Party, which neglected deflation and became absorbed in a consumption tax hike that would worsen chronic deflation, suffered a crushing defeat in the House of Representatives general election to Abe’s LDP, which advocated escaping deflation and bold monetary easing.
The Abe administration expanded the economy through Abenomics centered on unprecedented monetary easing, but it stumbled badly with the increase of the consumption tax rate to 8 percent in fiscal 2014.
After both the deflator and GDP fell sharply, they recovered somewhat under export-led growth, but in the latter half of last year nominal GDP was negative year on year for two consecutive quarters.
As for the external demand on which Japan relied, the expansion of the U.S. economy stopped, and the Chinese economy has shown a clear slowdown since the latter half of last year.
With the added blow of the Trump administration’s punitive tariffs against China, the deterioration of China’s economy is poised to accelerate.
If Prime Minister Abe still implements the 10 percent consumption tax rate, the word “nightmare” may become a boomerang and strike him himself.