Bank of Japan Gov. Haruhiko Kuroda showed little concern that the first phase of the sales tax hike could derail an economic rebound as Prime Minister Shinzo Abe decides whether to proceed with it.
“A two-step sales tax increase won’t (inflict) major damage to growth in Japan’s economy,” Kuroda said in a speech Monday in Tokyo, referring to the BOJ’s growth forecasts. “We consider a downturn in overseas economies to be the largest risk factor to the outlook for economic activity and prices.”
The comments are Kuroda’s most direct yet on the potential impact of the boost in the levy, weeks before Abe’s administration decides whether to go ahead with the first step — raising the 5 percent levy to 8 percent in April. While Finance Minister Taro Aso has said the government needs to proceed with the increase, Abe’s advisers, including Koichi Hamada, have expressed caution.
“The BOJ wants sales tax increases as it views them as a stabilizer for long-term yields,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo. “Kuroda is mindful that his massive easing will be meaningless if the market loses faith in Japanese government bonds.”
Any jump in concern about the sustainability of Japan’s public debt burden — the world’s largest — would add to pressure on a government debt market already facing the prospect of the end of 15 years of sustained consumer-price declines. Kuroda in April unleashed unprecedented monetary stimulus to rekindle inflation, which undermines the value of bonds’ fixed payments.
Kuroda was previously a senior bureaucrat in the Finance Ministry, which has pushed for the sales tax to be raised to help the government rein in its debt.
Abe has instructed his government to study the impact to the economy of various options for the sales tax, the Nikkei reported last week. The four options include raising it as planned, and freezing the tax for the time being, the newspaper said. The plan is to increase the tax to 8 percent next April, and then to 10 percent in October 2015.
Chief Cabinet Secretary Yoshihide Suga said Monday the decision will come before the start of the autumn Diet session, which has yet to be announced.
Even with a tax rise, the central bank expects real gross domestic product to expand 1.3 percent in the fiscal year starting in April, according to the median estimate of the nine BOJ Policy Board members released earlier this month.
Cushioning the economy from the blow to personal consumption from the tax hike could cost ¥5 trillion in additional stimulus, according to the median forecast of 23 economists in a Bloomberg News survey last week.