The Shinzo Abe administration in Japan has once again decided to postpone the consumption tax hike scheduled to have kicked in next year. Electoral compulsions aside, the economy is simply not in a position to face the brunt of the hike and is unlikely to improve significantly by next year. Consumer prices are falling again despite massive monetary stimulus and negative interest rates.
The state of the Japanese economy poses plenty of questions. When Japan will actually be able to raise tax rates is a big one. If it can’t, what will happen to its massive public debt stock running over 200% of the gross domestic product? With an ageing population, the pressure on social spending can only rise, and balancing the budget will become increasingly difficult with a shrinking tax base. What is truly worrying is that several developed nations might face similar problems with an ageing population in times to come. This bodes ill for the global economy’s future growth trends.