Raising the Consumption Tax in Japan: Why, When, How?

The note will make the case for a substantial increase in the VAT in Japan as a core measure of fiscal consolidation, assess its macroeconomic impact (on real activity and inflationary expectations), consider key elements in its design and implementation (dealing with the distributional consequences; ‘big-bang’ versus preannounced step increases); the importance of retaining a single rate and adopting compensating spending measures as needed) and a range of related issues (such as the pros and (likely even larger) cons of earmarking).