In historic step, Japan PM to hike tax; will cushion blow to economy
Japan's Prime Minister Shinzo Abe attends a seminar on Japan-UK security cooperation in Tokyo
By Shinji Kitamura and Takaya Yamaguchi
TOKYO (Reuters) - Japan's Prime Minister Shinzo Abe will take a step on Tuesday that none of his predecessors has tried in more than 15 years - making a dent in the government's runaway debt.
Abe, riding a wave of popularity with economic policies that have begun to stir the world's third-biggest economy out of years of lethargy, will announce that the government will raise the national sales tax to 8 percent in April from 5 percent, a final draft of the government economic plan, seen by Reuters, shows.
But at the same time he will soften the blow to the nascent recovery. As the tax increase is set to raise an additional 8 trillion yen ($81.42 billion) a year, Abe will also announce an economic stimulus package that, according to the draft, is worth 5 trillion yen.
A source involved in the process said the size of the package could increase somewhat, depending on how some corporate tax issues are dealt with.
The tax increase marks the first serious effort since 1997 to rein in Japan's public debt, which recently blew past 1,000 trillion yen ($10.18 trillion). At more than twice the size of the economy, this is the heaviest debt load in the industrial world.
The government has done little to rein in spending and is watering down the impact of the tax hike, so some critics doubt Tuesday's move will be enough to get Japan on track to achieve its goal of halving the budget deficit - excluding debt service and income from debt sales - by the fiscal year to March 2016 and balance it five years later.
"Even if Abe's policies go well, we still will not eliminate the primary budget deficit," said senior Standard & Poor's official Takahira Ogawa.
"It will just slow the pace of growth in outstanding debt and slow the pace of budget-deficit growth, but things would still be deteriorating," Ogawa, the ratings firm's Tokyo-based director of sovereign ratings, told reporters last week.
S&P could cut Japan's rating if it does not shrink its budget deficit, he said.
Still, pressing ahead with the tax hike bolsters the image Abe has sought to foster of a decisive leader, withstanding opposition from his advisers and some of his own party.
"This plan was already in the works, but we have to give Abe some credit for following through with it," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co.
Abe is seeking a difficult balance with massive fiscal and monetary stimulus to end 15 years of deflation and tepid growth, while setting the groundwork to get the government's finances in order over time.
Financial markets have given Tokyo the benefit of the doubt: the government can borrow 10-year money for less than 0.7 percent. But government officials and private economists have long feared a crisis in confidence in Japan's creditworthiness that could cause a crippling spike in interest rates.
The tax hike is part of a package agreed last year by the previous government and the two current ruling parties, as the first step in a doubling of the consumption tax - similar to a goods-and-services tax in other countries - over two years. The law stipulates that the government must confirm that the economy is strong enough to weather the tax hike before proceeding.