Home Business Koo: Japan Tax Hike Was “Disastrous”, Price inflation outpacing Wages

Koo: Japan Tax Hike Was “Disastrous”, Price inflation outpacing Wages

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Richard Koo, the chief economist the Nomura Research Institute, has been critical of the “bureaucrats” at the Bank of Japan and the Ministry of Finance for some time now, and his January 14th report notes that Prime Minister Abe’s election victory in December of last year was a big deal on several levels, but notes the economy is not doing well.

Koo highlights that Abe’s win was not only a victory for Abenomics and a mandate to postpone the economy-sapping consumption tax, but a critical win for the Japanese economy and democracy in Japan more generally. “His triumph is likely to have a major impact on the future relationship between Japan’s politicians and bureaucrats.”

Japan Koo


Japanese economy: December election was political tool to overcome bureaucrats’ resistance

Koo points out that the Japanese government is set up “such that most of the authority for actual fiscal outlays rests not with politicians but rather with bureaucrats at the Ministry of Finance. Even the politicians chosen by the people must kowtow to these bureaucrats.”

These austerity-minded bureaucrats were the ones that had forced Abe to institute the “disastrous consumption tax” last spring, and they were trying to do it again. As Koo put it: “…the people who were trying to decide Japan’s future were unelected bureaucrats and not elected politicians. Moreover, the course that they had chosen was the wrong one. I suspect Mr. Abe, the nation’s leader and the man who was trying to revive the economy with Abenomics, viewed this as a major crisis.”

Koo says that Abe wisely decided to postpone the tax hike and also call a general election, figuring that a major win at the polls would crush the bureaucrats’ resistance. In the ramp-up to the election, Abe took the offensive, threatening to take away the LDP’s official backing from any candidate who didn’t back his plan to delay of the tax increase. Winning an election without party support is an uphill climb, and even if elected, theie influence in policymaking circles would certainly be sharply curtailed.

Abe’s victory is reshaping the future of Japanese economy and politics

Abe strategy paid off, as nearly all LDP politicians who had been critical of the PM decided to toe the party line. The LDP was therefore able to almost totally blunt the influence of the bureaucrats, and it won a decisive victory in the election. The LDP’s statement electoral victory means that bureaucrats and individual Diet members are much more likely to close ranks and follow Abe’s lead.

Koo says this means a sea change in Japanese politics. “That, in turn, is likely to have a major impact on the future of Japanese politics. In that sense, the election represented a showdown between democracy and the bureaucracy, and Mr. Abe’s victory represented a great step forward for Japanese democracy.”

However, Koo notes that the situation is grim – one example he gives is regarding inflation- Richard Koo notes:

Impressions of prices, meanwhile, are largely unchanged: the percentage of respondents answering that prices have gone up “slightly” or “significantly” over the last year rose from 71.3% in June to 80.4% in September and came in at 79.5% in December.
The survey also asks participants where they think prices will be one year and five years from now. Here as well, the results had changed little over the last six months. About 80% expected prices to be “slightly” or “significantly” higher a year from now, and about 85% saw them rising over the next five years.

In short, views of current and future inflation have been fairly steady. Yet the percentage of respondents answering that the rise in prices is a “rather unfavorable” development rose from 78.1% in the June survey to 78.8% in September and 83.8% in December. I suspect this reflects the increasingly evident inability of wage growth to keep pace with price increases. 

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