Probability rises for Japan’s consumption tax hike in April 2017

According to latest estimates from the Council on Economic and Fiscal Policy (CEFP), Japan is expected to have a 9.2 trillion yen deficit (1.7% of GDP) in the fiscal accounts of the central and local governments in FY18, even with the assumption of 3% nominal/2% real economic growth. This will lead to a short fall in the government's target to improve the deficit to 1% of GDP, which will be an interim goal to balance its accounts in FY20.

Moreover, the CEFP also estimated that for FY20, the basic fiscal deficit would reach 6.5 trillion yen (1.1% of GDP) due to lack of an offset to finance exemptions to the planned consumption tax hike (to 10% in April 2017). This would mark a deterioration of 0.3 trillion yen against its forecasts in July.

It would be difficult to postpone the consumption tax hike scheduled for April 2017 under this severe outlook for fiscal consolidation.