We are now getting a real-world test case of the relative power of Abe verus the Finance Ministry bureaucrats on the issue of raising the consumption tax. The MOF and the Bank of Japan insist that Abe raise the consumption tax in April 2014, as specified in the 2012 law. So do the Cabinet Ministers allied with the bureaucrats, notably Finance Minister Aso and Economic/Fiscal Policy Minister Armari. Do do a majority of Keidanren leaders. On the other hand, Abe does not believe the promises of these bureaucrats that the tax hike will do little injury to the economy; he remembers the fate of Ryutaro Hashimoto after the 1997 hike.
Abe's most trusted political adviser, Chief Cabinet Secretary Suga is urging some sort of postponement or spending offset. So do a few of a private economists who helped Abe retake power, notably Yale Professor (and Cabinet Office advisor) Koichi Hamada. Abe has appointed a special commission of about 50 people to advise him.

The market is betting that the tax hike will proceed on schedule and, assuming no really bad economic news in the next few weeks, including the Sept. 9 second report on the April-June GDP, so do I. But my confidence level in my forecast is lower than a few weeks ago.

So, there are three tests:

1) Will Abe postpone or not?

2) If Abe does postpone, will the MOF seek to undermine him as they have done with previous PMs who crossed them on an issue they considered vital, and as most of the bureaucrats did with the DPJ government since its start in 2009? If the MOF does try to undermine Abe, how will he respond? Will he start firing personnel and hiring others?

3) If Abe does not postpone and 2014 looks a lot worse than the MOF-BOJ promised, what will Abe do vis-a-vis the bureaucrats who gave him bad advice?

For those of us who enjoy watching such developments, it could be a very intersting time. For Japanese citizens who have to live with the consequences, not as much fun.

Richard Katz
The Oriental Econoimist Report