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Cushioning the tax-hike blow

Abe banking on ¥5 trillion in stimulus

by Ayako Mie and Reiji Yoshida

Staff Writers

Shinzo Abe’s future as prime minister may depend on how well the ¥5 trillion stimulus package he unveiled Tuesday will cushion the economy from the blow of raising the sales tax to 8 percent.

The economic package was introduced along with the tax hike decision in order to protect the nascent recovery brought about by Abe’s set of policies dubbed “Abenomics.” The government also hopes to avoid the slowdown experienced after the consumption tax was raised by 2 percentage points in 1997 under the administration of Ryutaro Hashimoto.

The Abe team says the ¥5 trillion stimulus outlay will be more than enough to offset the negative impact from the tax bump and the economy will not lose momentum.

“The package should not only shore up the economy, which is expected to contract after the tax hike, but will leave the economy on track for growth,” Akira Amari, the minister in charge of economic revitalization, said at the news conference announcing the stimulus measures.

Mitsumaru Kumagai, chief economist at the Daiwa Institute of Research, said ¥5 trillion is the right size for the package to reduce the tax hike’s negative impact.

“The (estimated) size of the economic contraction is about ¥5 trillion. The administration probably will not need to issue additional government bonds to finance the package,” said Kumagai, referring to concerns about the government adding to the national debt, which is already more than twice the size of the economy.

The stimulus package, which will be included in the fiscal 2013 supplementary budget and fiscal 2014 regular budget, includes ¥1.1 trillion in tax breaks despite dwindling revenue.

Normally, half of the ¥92 trillion budget is financed with government bonds.

With the aim of bringing annual capital investment back to the pre-Tohoku disaster level of ¥70 trillion, Abe is introducing ¥730 billion in tax breaks to encourage companies to purchase equipment, fund research and development and commit to environmentally friendly or earthquake-resistance construction, as well as boost investment in startup technologies.

To stem the expected consumption slump, the government will give tax breaks for homebuyers totaling ¥110 billion, aside from cash handouts of up to ¥300,000 for people who buy homes, a program worth ¥310 billion.

Another measure provides ¥160 billion in tax breaks for companies that raise workers’ salaries by 2 percent from recent levels.

Abe has been criticized for raising the sales tax when the public has not seen real wage hikes needed to spur consumption. The administration has already introduced tax breaks for companies that have raised workers’ pay by 5 percent this year, but hopes to expand the program by easing the requirement to 2 percent.

In another measure to ease consumer frustration, Abe plans to give out ¥15,000 cash payments to 24 million people in low-income households, which will cost ¥300 billion.