Nobuyuki Nakahara, a former Bank of Japan policy board member and one of the key figures shaping Japanese Prime Minister Shinzo Abe’s aggressive economic strategies, warns that the Abe administration “should not rock the boat now” as he pushes for sidestepping that impending sales tax increase Abe is set to decide on. Along with Koichi Hamada and Etsuro Honda, Nakahara currently advises Abe on the central bank’s role in reversing years of deflation that has plagued the world’s third largest economy. These three advisers have one thing in common – their opposition to doubling Japan’s 5% consumption tax in two stages by 2015.
Nakahara argues that Japan’s economy is still far too volatile to be exposed to a tax crisis at this point. Many economists say that the sales tax increase is necessary to rein in Japan’s mounting debt burden, but those opposed to it – like Nakahara –say that the increase could very well kill of the momentum of ‘Abenomics’ – Prime Minister Abe’s aggressive fiscal policies that have seemingly brought hope for the Japanese economy. According to around 40 economists surveyed by the Japan Center for Economic Research, growth in the April-June quarter of 2014 will most likely fall by 5.13%, the worst quarter of growth since the March 2011 disasters. “People confuse economic recovery with an exit from deflation,” said Nakahara, adding that most product prices are still negative, and supply is still outpacing demand.
In Nakahara’s opinion, Japan should set a goal to post an annual growth rate of 1-2% in real terms and 3-4% in nominal terms for the next two to three years before the government can even start to think about proceeding with any fiscal tightening. Nakahara is currently advocating a gradual increase in consumption tax, by 1% each year over five years once deflation has ended. “We live in an age of uncertainty. We have to avoid economic fluctuations as much as possible and try to steer the economy on a steady course,” he said.