TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe’s plan to raise the national sales tax, painful medicine meant to address his government’s ailing finances, faces an important test this week with the release of key economic data.
Abe’s government has repeatedly flagged second-quarter gross domestic product (GDP), due on Monday, as a key factor in deciding whether the world’s third-biggest economy is recovering strongly enough to withstand the downdraft of the tax increase.
Growth is expected to slow from the first quarter, when it was the best among Group of Seven economies, but be robust enough to cope with the tax hike, which is meant as a first step in coming to grips with Japan’s enormous government debt.
The country’s public debt exceeded 1 quadrillion yen ($10.4 trillion) — or 1,000 trillion yen — for the first time in June, according to Finance Ministry data. That is about double the size of Japan’s GDP.
But Abe’s government is split, with some prominent advisers urging him to delay or water down the planned two-stage doubling of the tax to avoid derailing his pro-growth “Abenomics” programme, just as it shows early progress in ending 15 years of deflation and often-tepid growth.
June machinery-orders data on Tuesday will likely show companies remain reluctant to increase spending on factories and equipment, hindering a major driver of economic growth.
Abe’s coalition parties and the previous government agreed last year to raise the sales tax to 8 percent from 5 percent in April next year and to 10 percent in 2015. But the tax-hike law requires the government to certify that the economy is strong enough to weather the pain.
Government officials say Abe will scrutinise Monday’s GDP, as well as the revised figures due out on September 9, in making the politically sensitive call by early October, taking into account the views of academics and business leaders in a new advisory panel.
A Reuters poll of economists suggests that April-June GDP will grow an annualised 3.6 percent, slowing from 4.1 percent in the previous three months but still marking a third quarter of expansion and adding to signs that the positive effect of Abe’s reflationary policies is spreading.
That would give Abe enough economic reason to forge ahead with the tax hike. In another recent Reuters poll, 14 of 15 economists said Abe should proceed with the tax hikes as planned, with most saying he should raise the tax even if GDP growth should slow to just 1-2 percent.
“A strong GDP figure may heighten expectations that the tax hikes will proceed as scheduled,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research in Tokyo.
“But that’s a decision only Abe can make,” Shinke said. “What’s more important than past GDP figures is how the economy will perform if the tax rate indeed rises. At this stage, that’s very difficult to predict.”
The decision is complicated by the rift within the government. The reflationists could get some ammunition from Tuesday’s machinery orders data. Core orders likely fell 7.2 percent in June, according to a Reuters poll, a sign that any pickup in capital spending may be modest in coming months.
Pitted against the reflationist advisers, many academics and financial bureaucrats warn that Abe must stick with the plan. They argue that delaying tax hikes when the economy is performing so well would give markets the impression Japan is not serious about fiscal reform and could lead to a punishing spike in bond yields.
The tax chiefs of Abe’s two coalition parties recently told Reuters that he is on course to raise the tax as scheduled. They suggested the premier is promoting the public debate within his government to show his control over the Finance Ministry and to prod bureaucrats to come up with growth policies that will ease the pain of the sales-tax hike.
Bank of Japan Governor Haruhiko Kuroda has weighed in, saying last week that raising the tax won’t conflict with Japan’s goal of beating deflation.
If financial markets start to fear the central bank’s enormous purchases of government debt are aimed at monetising public debt, “long-term interest rates may spike and reduce the effect of our quantitative easing”, he told a news conference on Thursday.
($1 = 96.2550 Japanese yen)
Editing by William Mallard and Mark Bendeich