Japan has been here before, and the outcome was far from pleasant. Yet it seems the wheels are in motion. The country will double its national sales tax, from 5% to 10%. Justified as a way to help the country deal with its precarious fiscal situation, the move has raised serious concerns. This kind of a tax hike, applied for much the same reason, has been widely blamed for the country’s destructive late-1990s’ recession. Though some in Japan claim differences in the current environment, this history, the already weak global economy, and Japan’s recent decline into a balance of payments deficit argue forcefully for a different route to fiscal reform.

The need to address Japan’s budget situation is beyond cavil. This year, the country will likely see deficits rise to about 10% of its gross domestic product (GDP). Huge deficits have plagued Japan for years, as the government tried to prop up the economy’s meager growth prospects. Now, as a result, Japan also faces a huge debt overhang. According to the ministry of finance, outstanding bond obligations of the central government equal nearly 150% of GDP. The outstanding debt (including local governments) about doubles GDP. Japan has the distinction of facing the worst fiscal situation in the developed world. Debt-servicing costs already have about doubled as a percentage of total outlays since 1980, and in this fiscal year, even with interest rates as low as they are in Japan, the costs will amount to about 25% of all government expenditures. There is a real concern that matters have reached a point when these expenses will crowd out other necessary and legitimate government functions and bring on the untenable situation in which government goes deeper into debt largely to meet the obligations on its existing debt.

But if the need for fiscal reform is clear, questions nonetheless remain over whether a sales tax hike is the way to go about it. Certainly history would argue otherwise. Back in April 1997, for example, then-Prime Minister Ryutaro Hashimoto went this route, against a lot of opposition within Japan’s diet (its parliament) and the public. Recession began immediately after Hashimoto raised the national sales tax from 3% to 5%. Consumer spending, which had been growing at an annual rate of better than a 4%, fell during the second half of that year and into the middle of 1998. At its worst, the Japanese consumer made real cut backs at a yearly rate of more than 4%. Though the Japanese consumer is less significant to Japan’s economy than, say, the American consumer is to the U.S. economy, the economic effect was profound. Overall Japanese real GDP sank. A knock-on effect kept it declining, too. Japan’s economy did not show positive growth until late 1999, more than two years after the tax went into effect. Because of the economic shortfall, the budget deficit, far from shrinking, about doubled from its 1996 level.

Though much else occurred during that time (not the least the so-called Asian Contagion financial crisis), the sales tax hike has taken the blame for this very severe economic setback. In the present debate, the opposition to this tax move, both in and out of government, has reminded the administration of this experience and its ill effects on the fiscal situation. That opposition has, pointedly, also reminded current prime minister Yoshihiko Noda how his predecessor, Hashimoto, had to resign in June 1998 as a direct result of the tax and the ensuing economic slide. The prospect of another tax now has raised so much opposition in the ruling Democratic Party that Prime Minister Yoshihiko Noda  had to rely on votes from opposition parties to push the legislation through the diet. Contention has reached a point where party founder, Ichiro Ozawa, has led several members to split with the party. Such an act could throw Japanese politics into confusion and further delay any substantive fiscal reform.

If, then, the sales tax hike is politically and economically dangerous— counterproductive—Japan needs an alternative way to cope with the nation’s clear fiscal needs. As with all other developed economies, it will almost surely have to look for the answer in entitlements reform. Budget patterns make this painfully clear. Social security and related areas, mostly socialized medicine, now amount to some 29.2% of all government outlays, up from 16.6% in 1990 and 19.7% in 2000. It is the only major budget category, except, of course, for debt service, that has seen its proportion of the budget rise. Local grants have shrunk, as has discretionary spending, including education and defense—the former from 23% of outlays in 1990 to 18.4% at present, the latter from 29.7% to 23.1%. Even infrastructure spending, for which Japan is famous, has shrunk by almost half, to about 5% of the budget today. Without some entitlements reform, it is hard to see much deficit progress, even in the unlikely event that this sales tax hike spares the country adverse economic consequences.

If Japan’s politicians see the country as under-taxed and want tax increases as part of a budget solution, perhaps a sales tax hike should stand as a last, not a first, resort. With a strong yen and an aging population, Japan has a fundamental need to shift the economy’s growth engine from exports, on which it has relied on for decades, to domestic sources, consumer spending in particular. The need for such a shift is well known and widely commented on in government, academic, and policy circles. It has proceeded slowly because of the legacy of past anti-consumption policies (strictures against large-box stores, for example) that would otherwise make consumption cheaper and easier. Deflation has threatened to derail the needed shift as well by convincing Japanese householders to wait for lower prices before purchasing. A major sales tax hike would then not only risk recession and even larger budget deficits in the short and intermediate term but it also would further delay needed fundamental change in the country’s economic structure.