Abe gets more ammo to proceed with tax hike

Bloomberg

Prime Minister Shinzo Abe received a boost Monday for pressing ahead with a planned sales-tax increase when most members of panels advising the government backed the move even as they urged stimulus to cushion the economic blow.

Most of those in seven consultative panels favored proceeding with the April increase, economy minister Akira Amari said Saturday, after the final group met. Members of the panels, set up by the government, called for “sufficient stimulus,” he said.

The consultation exercise may help Abe justify raising the consumption tax to 8 percent in April from 5 percent now, the first of two increases that will ultimately double the levy to 10 percent. While the move will help shore up Japan’s finances — a topic Japan is set to discuss at a Group of 20 nations meeting in St. Petersburg, Russia, this week — the blow to consumption could send the economy back into contraction.

“We’re only two quarters into ‘Abenomics’ and I’m a little anxious that a sales-tax increase is going to undermine the process,” said Tim Condon, head of Asia research at ING Groep NV in Singapore. He said the government is more likely than not to proceed with the move.

“Abenomics” is the moniker that has been used to promote his radical economic program.

Abe is trying to sustain a recovery driven by fiscal and monetary stimulus as he moves on to tackle changes, such as serious deregulation, needed for a longer-term revival. The yen’s 20 percent verbally induced decline against the dollar in the past year and telegraphed gains in stocks have helped fuel a comeback.

A higher sales tax will boost government revenue, helping to maintain confidence in debt-saddled Japan’s bonds. In July, Finance Minister Taro Aso said Japan will present a credible framework for fiscal consolidation at this week’s G-20 meet.

Abe will decide whether to go ahead with the sales-tax increase by early October, Amari told reporters last week. Sixty economists, business leaders, regional representatives and other people presented their views via the panels. Of these, 44 supported an increase, NHK reported.

“We expect the government to announce by around Oct. 5 to 6 that the consumption tax rate will indeed be raised from 5 percent to 8 percent, effective April 2014,” Credit Suisse Group AG economist Hiromichi Shirakawa said in a note before the final panel meeting. The budget for the next fiscal year is likely to contain a range of stimulus measures to offset the effect, and the Bank of Japan may be called upon to deploy even more monetary easing than it is under its radical asset-buying, inflation-targeting scheme, he said.

Those opposed to the plan include Abe’s economic advisers Etsuro Honda and Koichi Hamada. They called for the tax to rise by 1 point a year to minimize the jolt to the economy. Japan should not raise taxes while it is still in deflation, Honda wrote.

Amari said panel members “thought the risks of not raising the tax were much larger than the risks from increasing it as planned.”

University of Tokyo professor Takatoshi Ito last week cited improvements in the economy as helping to justify pressing ahead with the plan, while a statistics bureau report showed that rising energy prices are helping Abe to make progress in pulling the economy out of deflation.

“Economic indicators show the economy isn’t in a bad state and raising the sales tax wouldn’t slow the economy or the bid to end deflation,” Ito, a former finance ministry official, told reporters. Not proceeding could lead to falling stocks, a stronger yen and a spike in bond yields, Ito wrote in a submission.

Japan’s economy has expanded for three straight quarters and it just logged its fastest inflation since 2008 in July, but largely because of increased costs for energy, not consumer demand.