The Bank of Japan will be able to achieve its 2 percent inflation target even if the sales tax is raised as scheduled next April, as the move is unlikely to stall the economy, BOJ Gov. Haruhiko Kuroda said Tuesday.
“Basically, a consumption tax hike will not let the economy stall to prevent us from achieving a 2 percent price stability target,” Kuroda said on an NHK program, suggesting the tax hike would have limited impact on the economy.
He also said Japan can still attain around an average 2 percent growth in the next three years if the government goes ahead with its plan to lift the current 5 percent sales tax to 8 percent next April and to 10 percent in October 2015. “The economic growth and consumption tax hike, or restoring fiscal health, can exist together,” Kuroda said, calling on the government to proceed with its efforts to achieve fiscal consolidation.
Prime Minister Shinzo Abe has said he will make a final decision this fall on whether to go ahead with the first round of the tax hike, regarded as key to fiscal reconstruction, while closely monitoring economic data and the possible effects on the economy.
While the BOJ says the domestic economy is “starting to recover moderately,” Kuroda noted it is difficult to have both urban and rural economies improve at the same time, indicating he sees regional differences.
But he reckoned that the economy is “steadily improving” and that the recovery is likely to spread not only to urban areas but also to rural ones and not only to major companies but also to midsize and small firms.
“A virtuous cycle of increasing production, income and spending has begun to take place,” he said.
Kuroda has been an advocate of steps to cut Japan’s debt burden, the largest in the world, and has said the BOJ will help cushion any blow to growth. Abe will consider the views of academics, economists, business leaders and others who will hold meetings Aug. 26 to 31 when he decides in the next month or so whether to raise the tax.
“He probably won’t hesitate to ease monetary policy further if Japan’s economy slows more than anticipated after a planned sales-tax increase in April,” said Soichi Okuda, chief economist at Sumitomo Shoji Research Institute. “Kuroda probably wants to avoid an incremental move.”
Also Tuesday, Motoshige Ito, an economics professor at the University of Tokyo’s graduate school who serves as a member of the Council on Economic and Fiscal Policy, said a step-by-step implementation of planned sales tax hikes is not desirable.
“I think at this stage that raising the sales tax rate step by step carries a high risk,” Ito told a news conference in Tokyo.
Ito said market participants “don’t expect the government to postpone or give up on raising the sales tax,” given the recent stability in the Japanese government bond market.
Ito made the remarks as some advisers to Abe have suggested that the sales tax hikes be delayed or implemented at a slower pace to reduce their negative impact on the economy.
University of Shizuoka professor Etsuro Honda, who is Abe’s adviser, recently suggested that the rate be raised by 1 percentage point per year over five years.