Prime Minister Shinzo Abe has decided to raise the consumption tax rate to 8 percent next April as planned, emphasizing the need to demonstrate fiscal discipline by making good on a pledge to the international community, a source close to him said Thursday.
Abe, who has been trying to shake the economy out of nearly two decades of deflation, is also considering implementing a stimulus package worth ¥5 trillion to prevent the tax hike from slowing down the economy, the source said.
A series of indicators, including revised April-June gross domestic product data released Monday, indicate the economy is steadily reinflating, while the success of Tokyo’s bid to host the 2020 Summer Olympics has also sparked hope that growth may gain momentum through the expected boom in construction and other sectors.
It will be the first increase in the consumption tax since it was raised to 5 percent in April 1997. The tax was introduced in 1989 at an initial rate of 3 percent.
Increasing the sales tax is widely regarded as a key to Japan’s fiscal rehabilitation. The nation’s fiscal health is the worst among the major developed economies, with public debt at more than 200 percent of GDP.
Abe’s administration has committed internationally to halving the ratio of the primary balance deficit to GDP by fiscal 2015, from the level in fiscal 2010. A deficit in the balance means the country cannot finance government spending other than debt-servicing costs without issuing new bonds.
The government has also promised to turn the primary balance into a surplus by fiscal 2020. However, the latest estimate by the Cabinet Office indicates the nation cannot accomplish this even if the consumption tax hikes are carried out and the economy stays on a steady growth path.
Any delay in the tax hike would harm the credibility of Japanese government bonds and prompt global market participants to let go of them, many analysts have said.
Bond prices move inversely to interest rates. If a bond sell-off accelerates, it would trigger a surge in long-term interest rates, which could hurt domestic demand with mortgage rates and corporate borrowing costs ballooning, they said.
Some government officials, however, have asked Abe to delay the hike or raise it by a smaller amount to start off, arguing that an increase of 3 percentage points could thwart his efforts toward reflation.