Japan starts tax hike hearings, final decision seen before October 7

TOKYO Mon Aug 26, 2013 9:47am BST

Workers hoist steel bars at a construction site in Tokyo August 12, 2013. REUTERS/Issei Kato

Workers hoist steel bars at a construction site in Tokyo August 12, 2013.

Credit: Reuters/Issei Kato

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TOKYO (Reuters) - Japan's government kicks off a week-long series of hearings with economists, business leaders and consumer advocates on Monday that may sway premier Shinzo Abe's decision on how to proceed with a planned hike in the country's sales tax.

During six days of hearings to Saturday, the government will gather opinions from 60 people on Japan's most significant fiscal reform in years - a change that is unpopular but equally seen as necessary to reduce Japan's public debt, which recently reached 1,000 trillion yen ($10 trillion).

The participants include academics, consumer and labour union heads and executives from businesses ranging from a small spring maker to auto giant Toyota Motor Corp (7203.T).

Under a multi-party agreement last year, the sales tax is to rise to 8 percent from 5 percent next April and to 10 percent in October 2015 to pay for rising welfare costs in the ageing society.

But the government must certify that the economy is strong enough to withstand the pain of the tax hikes before making a final decision on whether to carry out the plan. The tariff is similar to a general sales tax or value added tax in other countries.

Abe will make the final decision based on a summary of the debate compiled by Economics Minister Akira Amari.

Comments made in the hearings may offer clues on which way Abe's administration will lean in terms of the timing and scale of the tax hikes. They may also affect what steps the government takes to cushion the economy from the impact of the tax hikes if they proceed as scheduled, analysts say.

"The prime minister wants to gather as much as possible the various views and concerns people might have, so that he can make the right decision and consider what steps the government can take (in response to the concerns)," Amari told a television programme on Sunday.

"We'd like to decide on the best path taking into account the impact on the economy, the social welfare system, trust on Japan's fiscal state ... as well as views from overseas."

Amari said the premier will likely decide before the APEC summit on Oct 7 and may scrutinise the Bank of Japan's "tankan" quarterly business sentiment survey due on Oct 1.

Government officials have also flagged revised April-June GDP data, due on Sept 9, as key in reaching the decision. Preliminary data issued earlier this month showed the world's third-largest economy expanded for a third straight quarter in April-June but at a slower pace than expected.

DIVIDED

Abe has made ending 15 years of deflation and revitalisation of Japan's economy among his top policy priorities. Some of his advisers and members of his ruling Liberal Democratic Party want to delay or water down the tax hikes, worried they could hurt a budding economic recovery.

The Finance Ministry and the Bank of Japan want Abe to proceed given the nation's dire finances, with public debt having ballooned to twice the size of its $5 trillion economy.

Finance Minister Taro Aso and BOJ Governor Haruhiko Kuroda will join Amari in the hearings, as well as academics like Koichi Hamada, Abe's economic adviser and a vocal opponent of the current tax hike plan.

Most economists and business leaders feel the government should proceed with the tax hikes to maintain market trust in Japan's finances and to avoid confusion.

"If we can't exercise fiscal discipline this could be judged harshly overseas. Ratings downgrades could become unavoidable, which could be a trigger for a spike in bond yields," Toshiro Muto, a former BOJ deputy governor, told a seminar on Friday.

The public is divided. A poll taken by the Nikkei economic daily from Aug 23 to Aug 25 showed 24 percent of voters opposed raising the tax, and 55 percent wanted Abe to be flexible about the timing and scale of the tax hikes.

Government officials have signalled the possibility of offering tax breaks and compiling a small-scale extra budget for fiscal spending to ease the economic pain if Abe were to proceed with the tax hikes.

(Additional reporting by Stanley White; Editing by Neil Fullick)

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