OPINION | Japan’s tax blunder

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THE third time wasn’t the charm for Tokyo’s long-running attempt to increase its consumption tax. Data released last week showed that Japan’s economy contracted in the last three months of 2019 as the tax hike hammered growth — as many warned and like the previous two times the tax has been raised since its 1989 introduction, in 1997 and 2014.

Japan’s economy contracted by 6.3% on an annual basis from October to December. Plummeting consumer spending, which fell by 11.5%, is the main culprit. No wonder since Prime Minister Shinzo Abe raised the consumption-tax rate to 10% from 8% on October 1.

Some of the drop-off is a result of consumers trying to front-run the tax hike by ramping up consumption earlier in the year. Don’t expect a major reprieve once the VAT shock wears off. Wage growth is anemic despite a tight labor market, and the Labor Ministry calculates that inflation-adjusted pay fell 3.5% from 2012-2018. The tax rise creates a new and higher squeeze on household incomes.

The timing of the increase couldn’t be worse coming before the coronavirus outbreak in China, which depressed tourism and consumption during the lunar new year in January. Mr. Abe has managed to throttle Japan’s economy at precisely the moment it most needs resilience. Some analysts fear Japan is already in a consumption-tax-and-coronavirus recession, which is defined by two quarters in a row of negative growth.

The usual suspects are now calling for more Keynesian spending on public works and social spending. Three decades of similar blowouts have created the fiscal mess that always becomes justification for more consumption-tax hikes. Japan’s government debt is now about 240% of GDP.

The International Monetary Fund thinks the consumption-tax rate will have to rise to 15% over the next decade, and to 20% by 2050. But first the fund’s wizards say Tokyo must expand its Keynesian spending to make the economy “strong” enough to bear the tax hikes to pay for the spending. Got that?

Mr. Abe started out with better ideas, riding back into office in 2012 with a promise to press ahead with major policy reforms to unleash the Japanese economy. Had he done so, perhaps wage growth would be peppier now, the economy would be better able to endure shocks such as a Chinese epidemic, and economic growth would be boosting revenue.

It’s too late for Japan to avoid the costs of Mr. Abe’s economic failures. But other governments can learn the lessons that Japan’s leaders refuse to heed.

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