Japanese Prime Minister Shinzo Abe confirmed Monday the government will raise the consumption tax to 10 percent from the current 8 percent, telling his cabinet ministers to take necessary steps to mitigate the impact.
The new tax hike will come into effect on Oct. 1, 2019, Abe said at an extraordinary cabinet meeting.
According to a summary of the talks released by the government, Abe said he will make "all-out efforts and take all measures to prevent the tax hike from having a negative impact on the economy."
As Japan's population continues to both age and shrink, a phenomena referred to as a "ticking time bomb" by some economists and anthropologists, the 2-percentage point tax hike is believed to be the only way to cover the rising costs related to social welfare.
Some economists have voiced concern that the tax hike may see private demand diminish and hamper growth of the world's third largest economy, as was the case with the previous tax hike.
They have highlighted the fact that Japan's economy plunged into recession when the government raised the tax to 8 percent from 5 percent in 2014.
They have also noted that despite various iterations of the government's "Abenomics" brand of economic policies, Japan has a public debt amounting to 236 percent of its gross domestic product (GDP), the worst in the industrialized world, with social welfare costs expected to swell.
The Ministry of Health, Labor and Welfare requested a budget of 31.90 trillion yen (285 billion U.S. dollars), a new record high and a 2.5-percent increase from the previous budget, as spending on social security henceforth is expected to rocket to more than 32 trillion yen (286 billion U.S. dollars), up by about 600 billion yen (5.36 billion U.S. dollars).
These mounting costs are set against a backdrop of an increasingly tight labor market as Japan's workforce gradually becomes hollowed out.
With such downside factors in mind and in a bid to preempt the possible negative effects of next year's tax hike, Chief Cabinet Secretary Yoshihide Suga told a press briefing on the matter Monday that discussions were underway on ways to counter any serious fallout from the hike.
Such countermeasures will be drafted by the end of the year, he said, to coincide with the government drafting its budget for next fiscal year.
Suga restated that as per the government's position, the tax hike will be delayed for a possible third time, if a global economic crisis were to occur, such as the 2008 global financial crisis.
International Monetary Fund (IMF) chief Christine Lagarde has voiced caution to Japan about its planned tax hike and hoped that the increase should not damage the county's economic growth.
Prior to the hike to 8 percent from 5 percent in 2014, private consumption rapidly picked up in the months and weeks leading up to the tax increase, then individuals, households and businesses tightened their purse strings thereafter, ushering in the recession.
But Lagarde, speaking in Tokyo on the matter recently, said the higher consumption tax will help fund growing health and pension expenses, and support fiscal consolidation.
She added, however, that the IMF recommends that the 2019 consumption tax increase be "accompanied by carefully designed mitigating measures to protect near-term reflation and growth momentum."
"We believe that the fiscal stance should certainly remain neutral at least for the next two years," she said.
Japan initially raised its consumption tax from 3 percent to 5 percent in 1997. Under Abe's stewardship, the rate was then raised to the current 8 percent in 2014.
Next October's planned hike to 10 percent comes as the second stage of the two-stage hike from 5 percent.
The two-stage hike is based on an agreement made in 2012 between the relevant ruling and opposition parties at that time.
