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Nov 14, 2014 3:27 AM

Japan GDP data make-or-break for snap election

The Associated Press

TOKYO (AP) The release Monday of Japan's quarterly economic data, normally a routine event, is getting far more attention than usual: Prime Minister Shinzo Abe is expected to make the dour GDP reading the basis for calling a snap election.

Abe wants a renewed mandate as he weighs delaying a sales tax increase that is crucial to getting Japan's battered government finances into better shape. It would be the second of two planned tax hikes. The first, in April, sent the world's third-largest economy into a tailspin.

Putting off the tax hike slated for next year carries some risk that financial markets may doubt Japan's resolve to restore its ailing public finances. After many years of deficit spending the total public debt is more than twice the size of the economy and the largest among developed nations.

But Abe and his advisers appear to view the threat to Japan's recovery, which has limped along since the April 1 increase in the sales tax to 8 percent from 5 percent, as the more urgent risk.

Economists are forecasting the economy grew about 2 percent in the July-September quarter, a weak rebound after contracting 7.1 percent from a year earlier in the previous quarter.

The April tax hike's blow to consumer and corporate spending has been less severe than one in 1997 that is blamed for pushing Japan into a perpetual slump. But its dampening effects on corporate and consumer were harsher and lingered longer than expected.

Abe has previously said he would decide on the next tax hike after the Dec. 8 release of a revised GDP figure, but a spate of political funding scandals and a dip in his own popularity ratings appear to be hurrying things along.

So do numerous surveys showing over 70 percent of the public in favor of putting off a tax hike until later than next October.

"Everyone understands that we have to raise the tax one day," said Masamichi Adachi, an economist at JP Morgan in Tokyo.

"But politically speaking it looks wise to postpone the painful decision," he said.

A decision on the tax hike and on a snap election could come as early as Tuesday, and both ruling party and opposition lawmakers have begun campaign preparations, even though Abe and his spokesman, Chief Cabinet Secretary Yoshihide Suga, have refused to say what he plans to do.

As prime minister and head of the ruling Liberal Democrat Party, Abe can call an election whenever he wants up until December 2016. Holding a vote next month puts the opposition, already vastly outnumbered by the ruling coalition LDP and New Komeito, at a disadvantage.

The leading opposition group, the Democratic Party of Japan, is in disarray after their defeat in 2012, with public support ratings below 10 percent, or about a quarter of the Liberal Democrats'.

In stalling the tax hike, Abe would be defying the powerful Finance Ministry.

Finance Minister Taro Aso, in a finance committee meeting in parliament this week, said that without some other increase in tax revenues, delivering on promises to improve finances while putting off the sales tax hike would be "extremely tough."

In the same session, Bank of Japan Gov. Haruhiko Kuroda said he expected the sales tax to be raised in October 2015 as planned. He said an Oct. 31 surprise expansion in the central bank's monetary easing was meant to help the economy weather another tax increase.

The BOJ's Halloween surprise coincided with a long-anticipated announcement the same day that the government pension fund is shifting a larger share of its investments into shares and out of government bonds.

Those two measures boosted share prices to seven-year highs. If it continues, the boom in share trading could mollify the Finance Ministry and also nudge cash-rich corporations to raise wages, helping to support a more sustainable recovery.


Elaine Kurtenbach on Twitter: http://www.twitter.com/ekurtenbach


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