Abe needs more stimulus to raise sales tax, adviser Itoh says

The administration should consider a supplementary budget this year and will need to add stimulus for the economy to weather the planned increase in the consumption tax in 2015, according to Motoshige Itoh, a member of an advisory panel to Prime Minister Shinzo Abe.

“The current base scenario is to raise the consumption tax to 10 percent,” said Itoh, a University of Tokyo professor who is part of the Council on Economic and Fiscal Policy. “The key is how to provide a stimulus package that ensures the economy escapes an extremely negative impact.”

Abe will decide by the end of the year whether to raise the levy to 10 percent from 8 percent after gauging the state of the economy.

The sharpest contraction in more than five years last quarter after the tax rose from 5 percent has raised speculation that the next hike may be delayed.

Bank of Japan Gov. Haruhiko Kuroda said last week that fiscal consolidation is vital for Japan’s finances and the future of the economy.

“If there is any temporary and imminent difficulty facing the transition to a permanent boost in revenue, short-term spending in a way is natural,” Itoh said in an interview in Tokyo on Monday.

Abe aims to halve the budget deficit in the 12 months starting next April, compared with the level five years earlier. He is targeting a surplus in the measure known as the primary balance in the year starting April 2020.

“A smooth path to the 10 percent sales tax will probably ensure the primary balance target for fiscal 2015,” Itoh said.

To achieve a surplus in the primary balance, the administration will also need to speed up strategies aimed at boosting the nation’s growth rate, he said.

Finance Minister Taro Aso told the Diet in March that it would be “very difficult” to achieve a primary balance surplus in the budget in 2020.

There is no need for the BOJ to rush into further monetary easing, said Itoh.

“Prices are basically moving in line with the BOJ’s projection,” he said.