Why did Japanese Finance Minister Shigeru Ishiba rule out lowering the consumption tax to ease inflation?

In the early days of his administration, Japanese Prime Minister Ishiba Shigeru made it clear that he would not alleviate inflationary pressure by lowering the consumption tax. Instead, he would shift the policy focus to wage growth, corporate investment, and structural reforms. This decision reflects both the real predicament faced by the Japanese economy and the difficult trade-offs policymakers have to make among multiple goals.

I. Historical Lessons and Real Constraints of Consumption Tax Reform

Since its introduction in 1989, Japan's consumption tax has undergone multiple adjustments and has become a core pillar of government revenue. On the one hand, Japan's government debt-to-GDP ratio has exceeded 260%, far exceeding the international warning line. While lowering the consumption tax can stimulate consumption in the short term, it would directly weaken fiscal revenue and increase the risk of debt sustainability. On the other hand, Japan's household savings rate has long been higher than the OECD average, and the impact of consumption tax adjustments on marginal propensity to consume is limited. According to data from the Cabinet Office of Japan, household consumption expenditure in Japan decreased by 2.9% year-on-year in 2024, reflecting that rising prices have already suppressed consumption. At this time, tax cuts may not be easily translated into actual demand.

II. The Double-Edged Sword Effect of Structural Reforms

To support the wage growth strategy, the Ishiba government has launched a 39 trillion yen economic stimulus plan, with 10 trillion yen allocated to the AI and semiconductor industries, aiming to drive 50 trillion yen in public and private investment within 10 years. This layout is both a continuation of the "Abenomics" industrial policy and an attempt to enhance total factor productivity through technological upgrading. However, structural contradictions in the Japanese labor market may limit the effectiveness of the policy.

Japan's unemployment rate has long been below 3%, but a "labor shortage" coexists with "low efficiency". In 2023, 313 companies went bankrupt due to a lack of manpower, mainly in the construction and transportation service industries. Although the government has encouraged equipment investment by enterprises through subsidies, the equipment automation rate of small and medium-sized enterprises is still less than 30%, far lower than Germany's 60%. If productivity and wage growth cannot be simultaneously enhanced, inflation may evolve into "cost-push inflation", further squeezing corporate profit margins.

III. External Risks and Policy Tolerance Rate

The sensitivity of the Japanese economy to external conditions cannot be ignored. If the Trump administration were to restart its tariff policy, it could impact the exports of Japan's pillar industries such as automobiles and semiconductors. Fluctuations in the yen exchange rate also constitute a key variable. Goldman Sachs predicts that the USD/JPY exchange rate could rise to 159 by 2025, and the price pressure of imported goods would partially offset the effect of wage growth.

Against this backdrop, the Ishiba government's decision to maintain the stability of the consumption tax is essentially trading fiscal discipline for policy credibility. Bank of Japan Governor Kuroda Haruhiko has explicitly stated that the normalization of monetary policy will be based on the sustainability of "wage-driven inflation" rather than short-term price fluctuations. This "time-for-space" strategy not only avoids repeating the failure of quantitative easing in the later stage of "Abenomics" but also reserves a window period for structural reforms.

IV. Focus of Future Policy Games

The policy choices of the Ishiba government are essentially seeking a delicate balance among inflation control, fiscal sustainability, and economic growth. In the short term, the government needs to alleviate the pressure on people's livelihoods through subsidy policies, such as providing cash subsidies to low-income families and restarting energy subsidies. In the medium term, promoting the digital transformation of small and medium-sized enterprises and improving the matching mechanism of the labor market will be key to enhancing the efficiency of policy transmission.

However, if wage growth fails to meet expectations in the spring 2025 labor-management negotiations or if the global trade environment deteriorates sharply, the government may be forced to adjust its strategy. At that time, consumption tax reform may re-enter the policy discussion, but it is likely to take the form of "differentiated tax rates", such as implementing low tax rates on essential goods like food and energy rather than a comprehensive reduction.

The Ishiba government's decision to rule out a reduction in the consumption tax is both a reflection on historical lessons and a compromise to current constraints. In the three variables of whether the "wage-price spiral" can be sustained, whether structural reforms can be effective, and whether external risks can be controlled, the failure of any one link may force a policy shift. The future direction of the Japanese economy will depend on the outcome of this complex game.