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Japanese PM's adviser calls for delay in next sales tax rise to 2017
September 1, 2014 / 10:58 AM / in 3 years

Japanese PM's adviser calls for delay in next sales tax rise to 2017

TOKYO (Reuters) - An economic adviser to Japanese Prime Minister Shinzo Abe said on Monday that a planned rise in the sales tax should be delayed by a year and half to 2017 because a first increase in April had hit the economy harder than expected.

A Japanese national flag flies in front of the building of Japan's Financial Services Agency in Tokyo August 7, 2014. REUTERS/Toru Hanai

Etsuro Honda, a prominent outside architect of Abe’s reflationary policies, added to a recent chorus of concern about the sales tax rise due next year, which has clouded the outlook for Japan’s efforts to rein in public debt.

Prime Minister Shinzo Abe is due to decide in December whether to go ahead with the second sales tax rise in October 2015, after assessing third-quarter gross domestic product data and other forthcoming indicators.

The University of Shizuoka professor said recent weak economic indicators including household spending, factory output and exports made him think the economy was clearly “undershooting” what he had been expecting just a couple of months ago.

In July, Honda told Reuters the economy was on track after April’s sales tax hike and he dismissed the need for fresh Bank of Japan stimulus.

Now he sees a distinct possibility that the BOJ could ease policy further.

“Regardless of the next sales tax hike, it could be that additional monetary easing might be called for if inflation and demand fail to pick up and the output gap doesn’t narrow,” Honda told Reuters in an interview.

“I can fully see the possibility that such a situation will occur.”

While analysts generally expect Abe to give the go-ahead in December to raising the tax in October 2015 to 10 percent from 8 percent, some advisers, including Vice Economy Minister Yasutoshi Nishimura, are urging the prime minister not to rush into an increase that could derail recovery.

Honda said he believed the next sales tax rise should be postponed until April 2017, and even then imposed only if wage rises had caught up with inflation and the BOJ’s inflation target of 2 percent had been met in a sustainable way.

Honda added that wages held the key to a virtuous cycle of economic expansion coming about through Abe’s pro-growth policies, dubbed Abenomics, but a sales tax increase next year would “run counter” to such a policy.

“Abenomics is aimed at generating growth through a virtuous cycle, but a sales tax hike could put a damper on the economy and cause a contraction in the near term,” he said.

A premature increase in the sales tax risked pushing the economy back into deflation, Honda said. If the government decided to go ahead, he said, fresh monetary and fiscal stimulus would be needed to stop the higher tax rate hurting the economy.

A preliminary government estimate showed the economy shrank an annualised 6.8 percent in the second quarter, more than erasing a 6.1 percent first-quarter surge ahead of the rise in the sales tax to 8 percent from 5 percent on April 1.

The two-stage rise in the consumption tax is Japan’s boldest move in nearly two decades to rein in government debt, which has ballooned to more than twice the size of the economy, the biggest burden in the industrialised world.

Honda said he had not put his proposal to the prime minister yet, adding that he expected the debate to heat up from October.

Additional reporting by Yuko Yoshikawa and Linda Sieg; Editing by William Mallard, Edmund Klamann and Alan Raybould

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