WAS the decision to raise a key tax this year a big mistake? For years, the political consensus has been that Japan’s consumption (ie, value-added) tax needs to go up in order to control a ballooning public debt. In April the government of Shinzo Abe carried out a decision made by the previous government and lifted the tax from 5% to 8%. That is still low by developed-country standards, but it seems to have inflicted more pain than most predicted. Reports from Tokyo’s brothel districts to the country’s rural regions suggest the move has hurt an already limp recovery.
The last time politicians dared raise the consumption tax was back in 1997. It helped push a recovering economy back into recession. Then, however, the move coincided with a financial storm in Asia and a bad-loans crisis at home. This time, politicians seemed surer that people would soon head back to the shops. Yet the fall in household demand has proven even sharper than in 1997 (see chart), and a recession is again on the cards. The economy shrank by an annualised 7.1% in the second quarter of the year. Economists are growing nervous about Japan’s third-quarter GDP, to be published on November 17th.
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