Keidanren, Consumption Tax, and the Lost Decade of the 1990s in Japan

This study examines the dynamics of the "lost decade" of the 1990s in Japan by analyzing the major role of Keidanren (Japan Business Federation) in advocating the raise in the consumption tax rate from 3% to 5% in 1997. Some observers blame this action for halting an incipient recovery from an extended period of economic stagnation since 1990, throwing Japan into another recession, and hence contributing to the nation's deflationary doldrums that continue today. This paper traces the changing attitudes of Keidanren toward the consumption tax, from opposing proposals for it in the late 1970s to zealously advocating it in the mid-1980s, accepting its passage in 1988 at the rate of 3%, and supporting an increase to 5% in the middle of a severe economic downturn. The main motivation was to achieve long term goals of balancing the national government's budget and funding increased services for a rapidly aging population at the risk of hampering the shorter-term goal of economic recovery.