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Most on Abe’s expert panel approve plan to hike sales tax

Economists, however, are divided

by Ayako Mie

Staff Writer

The government’s expert panel on the planned consumption tax hike wrapped up discussions Saturday with more than 70 percent of its members supporting the plan as it now stands, saying Japan will suffer a much bigger economic blow if the tax isn’t raised.

Prime Minister Shinzo Abe, before leaving Oct. 7 for a meeting of the Asia-Pacific Economic Cooperation forum, will be deciding if the government should follow through on the original plan to raise the tax by 3 percentage points to 8 percent next April and then to 10 percent in October 2015.

The prime minister will have to engage in a delicate political balancing act in deciding when and how to raise the tax without losing the trust of the international community, which has pushed Japan to reduce its more than ¥1 quadrillion debt, and without seeing his approval rate plunge for raising taxes.

The decision will be based on revised figures for April-June gross domestic product, which will be announced Sept. 9, and the panel’s opinions.

Economic policy minister Akira Amari said Saturday that Abe will receive a report on the panel’s discussion in early September.

“If we are going to introduce the levy, we need to fully grasp the possible risks that accompany it,” Amari said after the panel wrapped up its six days of work. “We might fail if we do not have enough countermeasures (against the resulting negative impact on the economy). We should have more than enough to be prepared.”

The panel, comprising 60 people representing fields ranging from business and academia to nonprofit organizations, was set up by Abe so he could claim that sufficient discussions were held on the tax hike.

Recent polls show that the public is also divided on the timing of the hike and by how much it should be raised.

While data released Friday showed that the consumer price index rose by 0.7 percent in July from a year earlier for the second straight month of gain, Abe’s economic policies dubbed “Abenomics” have not achieved other tangible economic benefits, such as wage hikes.

More than 70 percent of the panel came out in support of the consumption tax hike as it is currently planned, but the members who are economists were sharply divided.

University of Tokyo professor Takatoshi Ito said raising the levy would not hamper the fight against deflation.

His opinion was supported by Yoko Takeda, chief economist at the Mitsubishi Research Institute, who said that unless the tax is raised as scheduled, investors will sell Japanese government bonds and trigger a surge in long-term interests rates.

Yale University professor Koichi Hamada, a special adviser to Abe, said the increase should be delayed for one year or that the tax should be raised gradually, by 1 percentage point each year.

“Demand might go down and tax revenue might be reduced if we raise the tax when Japan is still suffering from deflation,” Hamada said Tuesday.

His idea was echoed by Etsuro Honda, another adviser to Abe and a University of Shizuoka professor, who said Japan has to get away from deflation by increasing nominal gross domestic product before introducing a full-scale levy.

“April next year is a very critical stage to forge economic sentiment,” Honda said Saturday. “I propose raising the tax by 1 percentage point annually so that the sentiment will also be pushed up.”

Raising the tax to 10 percent in October 2015, as currently planned, would generate an estimated ¥14 trillion in additional revenue for the government, money that is needed to fund the social welfare system, which currently costs more than ¥109 trillion a year.

Some panel members were especially keen to make sure the revenue from the hike be used for welfare and child-rearing support, while the ruling Liberal Democratic Party is pushing massive public work projects.

The land and infrastructure ministry is seeking ¥5.8 trillion in the fiscal 2014 budget.

“The revenue should finance child-rearing support by accommodating all children in day care,” said Yoshie Komuro, president of Work Balance Co.

While endorsing the consumption tax hike, business leaders also demanded that the government likewise lower the corporate tax and introduce some countermeasures to offset the possible negative impact of the sales tax rise.

Abe has instructed government ministries to mull ways to cut the corporate tax. The LDP-New Komeito ruling bloc will expedite discussions on tax breaks for capital investment to be included in a bill to promote industry competitiveness. The bill will be submitted to the extraordinary Diet session scheduled to start in October.

Abe will be tested at the Group of 20 summit this week in St. Petersburg, Russia. It is uncertain whether the international community will offer much support for his plan to restore Japan’s fiscal health without reaching a decision on the tax increase.