Abe Proposes Raising Japan's Sales Tax

The current rate of sales tax in Japan is 5%. If Prime Minister Shinzo Abe gets his way, it will leap to 8% in April 2014.

Japan has "enormous debt," currently "more than twice the size of Japan's economy and larger than the economies of Germany, France and Britain combined." Mr. Abe hopes to take a bite out of it with the sales tax increase--or more accurately, an increase to the value added tax (VAT). The prime minister argues that "there is no road left for us but to grow our economy and build our finances at the same time." Much of the 8.1 trillion yen raised by in the first year of the tax increase would end up back in the economy as part of a stimulus package. (New York Times).

According to Tobias Harris of Teneo Intelligence, a financial advisory firm, the VAT increase "will signal to investors and the international community that [Abe's] government is serious about tackling Japan's deficits and debt." Funneling most of that revenue into a stimulus package "will show that his government is still focused on triggering sustainable growth."

Mr. Abe's plan allows for a second sales tax increase--to 10% in October 2015--after a government review of the state of the economy. If that seems high compared to today's rate of 5%, consider this: the average rate of sales tax among nations in the Organization for Economic Cooperation and Development, of which Japan is a member, is 18%. And an article in the Financial Times points out that members of the European Union "are obliged to extract VAT of least 15%, and most squeeze out much more."

Still, the last time Japan had a sales tax increase it "fell into a deep recession." That was in 1997, when the rate moved from 3% to 5%.

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