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Last updated: October 1, 2013 6:29 am
Shinzo Abe, Japan’s prime minister, pledged to press ahead with the first increase in sales tax for over 15 years despite objections from some of his closest advisers, gambling that measures to address the country’s massive debts would not hinder his attempts to jump-start the economy.
Mr Abe said on Tuesday he would couple the consumption tax hike with roughly Y5tn in new public works spending, cash grants and other stimulus in order to blunt any negative impact on the economy.
Even so, the move will test the strength of an economic revival that has been underpinned by Mr Abe’s expansionary policies – the “Abenomics” mix of government spending and loose monetary policy that has delivered the fastest growth among Group of Seven countries this year.
“We have no choice but to accomplish economic recovery and fiscal consolidation at the same time,” the prime minister said in a televised announcement, adding he had made the decision in order “to maintain faith in the country and to pass on a sustainable social-security system to the next generation.”
The plan to increase the tax from 5 to 8 per cent next April had been approved by a previous government with the support of Mr Abe’s Liberal Democratic Party. But it was opposed by economists who had helped the premier draft his Abenomics strategy, as well as by some LDP politicians. The last time Japan increased the levy, in 1997, a deep recession followed that shook the party’s grip on power.
Mr Abe confirmed the plan following a business-confidence survey that showed optimism among Japanese companies had risen to a six-year high.
It was the latest in a series of positive reports on the world’s third-largest economy, which has struggled for years with stop-start growth and deflation. Gross domestic product expanded at an annualised rate of 4 per cent in the first half – more than double the rate of the US and quadruple Japan’s average during the past two decades.
The growth has come at a cost, however. An even larger stimulus package introduced by Mr Abe early this year pushed the government’s gross-debt ratio, already the highest in the developed world, to almost two and a half times the size of the economy.
If Shinzo Abe had really been looking to the “Tankan” survey as a definitive guide to whether Japan’s economy could withstand a fiscal squeeze, he could have found encouragement on almost every page.
The quarterly survey conducted by the Bank of Japan, which takes the pulse of more than 10,500 companies of all sizes across the country in the month leading up to publication, showed that the headline measure of confidence among large and medium-sized enterprises was as its highest level since the final quarter of 2007, buoyed by exporters seeing a pick-up in external demand and by non-manufacturers enjoying a recovery in domestic consumer spending.
Cheeriest of all was the ceramics, stone and clay sector, where the so-called “diffusion index” – the percentage of respondents saying business conditions are good, minus those saying conditions are bad – was at a 21-year high in September.
Mr Abe said details of the latest spending measures would be decided in early December, but listed a number of steps that his government is considering. They included expanded tax relief for homebuyers, cash disbursements for low-income earners and the early repeal of a surcharge on corporate income tax that was put in place to fund rebuilding after the 2011 Tohoku earthquake.
The latter benefit, he suggested, would be made available to companies on the condition that they expand hiring or raise workers’ wages.
Mr Abe reiterated an official commitment to halving Japan’s budget deficit, excluding interest payments, by 2015 and eliminating it by 2020. But Marcel Thieliant, an analyst at Capital Economics, said the stimulus plan – which could consume most of the revenue raised by the tax hike in its first year – would make the task more difficult.
“The decision to offset some of the fiscal benefits with additional stimulus measures means that fiscal consolidation targets may have to be watered down, which leaves credibility at risk,” he said.
The true cost of the new spending could be smaller, however, if it helps Japan avoid a sharp slowdown. Business leaders welcomed the compromise, with Hiromasa Yonekura, chairman of the Keidanren corporate lobby, calling it a “decisive judgment”.
Kazuo Hirai, president of Sony, said: “Fiscal stability is good for the country and society in the medium to long term, so I have hopes for [the plan’s] positive aspects.”
Polls show the Japanese public is evenly split over the tax increase, which is the first of a planned two-step rise that, if fully implemented over the next two years, would take the rate to 10 per cent.
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