Finance and economics
Japan's consumption tax
A crucial rise in a controversial levy may be in doubt
THE Japanese are among the world's most reluctant taxpayers.
They reserve their deepest loathing for value-added tax.
That may be because one of the inventors of VAT, Carl Shoup, an American economist, used them as guinea pigs for his new levy during the occupation after the second world war.
Japan soon scrapped VAT, reintroducing a consumption tax only in 1989.
This quickly became as hated as its foreign-imposed forerunner.
The gaijin are watching again as Japan struggles to raise the consumption tax for only the second time since its introduction.
The IMF, the OECD and local institutions all reckon a series of rises is the only way for Japan to control its gross public debt, approaching 250% of GDP.
The Democratic Party of Japan, which won legislative backing for the hike last year, argued that without it Japan could soon go the way of Greece.
Financial markets have counted on the tax rise going ahead despite a change of government since then.
This week the authorities surprised them by saying they would set up a panel to examine whether to proceed as planned.
The plan is to lift the levy from 5% to 8% next April and to 10% in 2015.
That would bite just as Abenomics, a popular three-part plan to reflate the economy, designed by Shinzo Abe, the prime minister, is taking off.
The first two stages, a radical monetary loosening by the Bank of Japan and a generous fiscal stimulus, were aimed at jolting consumers out of their deflationary mindset and inspiring firms to invest.
But so far it is mainly the urban wealthy and big firms that are benefiting.
A consumption-tax increase, on the other hand, would immediately lighten all pockets.
The fear is that a rise in revenues from the tax could be far outweighed by years of lost growth if consumers take fright.
The only other consumption-tax rise, of 2% in 1997, was blamed for consigning Japan to a second lost decade, though this coincided with other events such as the Asian financial crisis.
Without counting broader knock-on effects, says Robert Feldman of Morgan Stanley, the 3% rise scheduled for 2014 would reduce GDP by over 1%.
An alternative could be to lift the tax more gradually.
Koichi Hamada, an economist at Yale University who helped to design Abenomics, has said that the levy could be raised in increments of 1% over five years.
Mr Abe's panel will study this option, among others.
As long as the tax is raised significantly in some way, says Naka Matsuzawa at Nomura Securities, the bond market would probably stay calm.
Ditching the tax increase entirely remains unthinkable.
Recent economic indicators, such as strong real annualised GDP growth of 4.1% in the first quarter, as well as a slightly improved jobs market, leave Mr Abe with little excuse but to go ahead.
The BoJ this week added its voice to those pushing for a rise.
And taxpayers may be more accepting than the politicians think.
An unscientific straw poll by The Economist found that seven out of ten shoppers in Ginza, a high-end shopping district, were ready for a tax increase, as narrowly preferable to a debt crisis.
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