Whether the economy can achieve its potential in a stable manner will be a key issue when the government considers the timing for a consumption tax hike, economic and fiscal policy minister Kaoru Yosano said in a recent interview.
Raising the sales tax could adversely affect the economy by slowing private consumption and weakening the corporate appetite for capital spending, so the government must be careful about the timing of any such increase, he said Thursday.
"If Japan grows at around its potential (rate), then it is obvious that the economy is recovering," he said. "When the growth rate is negative, it's difficult for the government to talk about taxes."
Yosano said Japan's potential growth rate could be around 1 to 1.5 percent a year in terms of gross domestic product, although he admitted there are many other views.
The Cabinet Office forecasts the economy could grow a price-adjusted 3.1 percent in the fiscal year ending in March, aided by the temporary effects of fiscal stimulus measures, while projecting an expansion of 1.5 percent the following year.
The government has said a tax hike should only be considered after the economy recovers.
But Yosano said this condition is vague, suggesting clearer indications will be made later this year.
Yosano joined the Cabinet of Prime Minister Naoto Kan last month from the opposition as Kan seeks to revamp the national social security and taxation systems, including a possible consumption tax hike from the current 5 percent to help finance swelling welfare costs.
Pointing to the difficulty of deciding on when to hike the value-added tax, Yosano said the issue is urgent.
"If we delay, we could face another problem — deteriorating fiscal conditions that negatively affect the economy," he said, stressing that a tax hike will eventually require a "political decision."
