Daily Times

As Japan stares into the abyss, Friedrich Nietzsche is staring back at it. Tokyo, after all, has the German philosopher’s what-doesn’t-kill-you-makes-you-stronger sentiment in mind as some officials insist on raising taxes in a deflationary and recession-prone economy. Japan would be crazy to do it. Households and businesses are still smarting from a 2014 sales-tax hike, never mind a second jolt planned for 2017. But then Prime Minister Shinzo Abe also is being told he’d be crazy to postpone it. His Ministry of Finance warns delay would dent Japan’s reputation in markets. Opposition parties say it would necessitate the resignation of his entire cabinet. The president of Mizuho, Japan’s second largest bank by assets, says Tokyo risks a credit-rating downgrade. Abe may announce a decision as soon as Wednesday. Whatever he says, I assign zero odds to Tokyo actually raising sales taxes from 8% to 10% next year. And as Abe looks into the financial abyss, it’s his own failure to implement a single major structural reform after 41 months in office staring back at him. Abenomics promised to hasten growth, boost wages, create jobs and raise productivity. Instead, Abe got the Bank of Japan to do all the work, while he tended to pet projects like tweaking the pacifist constitution. If Abe’s team had unleashed a startup boom, loosened labor markets, lowered trade barriers and reined in government bureaucracy, it wouldn’t need to raise taxes – receipts would be swelling with gross domestic product. Adding fresh fiscal headwinds wouldn’t make the economy stronger – it would simply kill any remaining prospect of stable growth going forward. Abe finally seems to be internalizing failure. At last week’s Group of Seven meeting, he even channeled Chicken Little by warning of another Lehman Brothers-like shock. Odds are, Abe was setting the stage for delaying the tax hike for a second time. Abe had said only a giant earthquake or Lehman replay could justify putting off efforts to pay down debt. So, Abe tried to drum up his own little G-7 trembler for domestic political gain. The prime minister also is trying to blame the failure of Abenomics on the global economy. If only China’s growth were stronger and Nietzsche’s Germany weren’t such a tightwad, Japan might be booming. It means that as Abe looks into the void, delusion are peering back at him. So where does this leave Japan? Abe is effectively admitting, finally, that the three original “arrows” that comprise Abenomics – monetary, fiscal and deregulatory – haven’t worked. He’s further stipulating that the additional three arrows he announced in late 2015 – promoting innovation, child-case assistance and more nursing facilities for the elderly – are equally unimaginative and timid. The key, as this column has argued before, is to implement the supply-side reforms Abe pitched three-plus years ago. The BOJ long ago reached the limits of its ability to create self-sustaining growth.