It could be difficult for the Bank of Japan to taper its record monetary stimulus before a planned sales-tax hike in 2017, and the government may need to compile a ¥2.5 trillion economic package to cushion the blow to households, an adviser to the prime minister said Tuesday.
Etsuro Honda, who has known Prime Minister Shinzo Abe for three decades and advises him on economic matters, said the government would need to “take a cautious approach” after an increase in the levy last year sparked a recession.
“Fiscal spending of about ¥2.5 trillion will probably be needed to counter the impact,” Honda said in an interview at the prime minister’s office in Tokyo.
Abe’s government is walking a fine line as it attempts to rein in a debt burden that’s more than twice the size of the nation’s annual economic output. At the same time, Abe’s hand picked central bank chief, Haruhiko Kuroda, is pumping money into the economy to rekindle inflation that Japan needs for growth.
Tapering before April 2017 “is a bit hard to imagine,” said Honda. “The BOJ will have to judge whether it can taper by looking at the degree of deceleration after the tax hike. When the economy is slowing, it can’t start tapering.”
An increase in the tax from 5 percent to 8 percent in April last year sparked two quarters of economic contraction, even after Abe unveiled a ¥5.5 trillion stimulus package in December 2013. The next planned move would take the levy to 10 percent
Honda was instrumental in persuading Abe last year to postpone the next hike by 18 months to April 2017.
While some private economists, including those at Nomura Holdings Inc., predict that tapering of monetary stimulus could begin next year, Kuroda sees the BOJ’s 2 percent inflation target as distant as mid-2016.
“The BOJ must make inflation stable,” said Honda,. “It has to discern if 2 percent inflation can be maintained, and then in principle they can begin tapering.”
Honda added that there is no need for the BOJ to bolster stimulus now, with a recovery on track. While he says it’s unlikely, if inflation isn’t on the road to 2 percent by September or October this year the central bank may have to consider the option.
Any economic package the Abe government compiles will probably be designed to cut the impact of the levy hike in half for households, Honda said.
The yen, which has depreciated by about 30 percent since Abe came to office, is at a comfortable level, Honda said.
“The yen between 120-125 is no problem at all,” according to Honda.
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