November 2, 2018 / 1:28 AM / 11 days ago

Japan's PM says he won't force sales tax hike if shock hits economy

TOKYO (Reuters) - Japan’s prime minister on Friday warned against forcing through a proposed sales tax hike next year if economic conditions worsened, a sign he was open to postponing the increase for a third time if circumstances required it.

FILE PHOTO - Shinzo Abe, Japan's prime minister, speaks during a joint news conference with Narendra Modi, India's prime minister, not pictured, at Abe's official residence in Tokyo, Japan October 29, 2018. Kiyoshi Ota/Pool via Reuters

Shinzo Abe also defended the Bank of Japan for missing its 2 percent inflation target, saying the central bank’s ultra-loose monetary policy has helped create more jobs.

“It’s true the inflation target has not been met. But the inflation target is not just a goal but the means for achieving what’s most important for the economy, which is to create jobs,” Abe told parliament.

“I’m confident the BOJ also looks carefully at job growth in guiding monetary policy.”

The premier has already pushed back an increase in the domestic consumption tax to 10 percent from 8 percent twice, including in 2016 when he cited global risks such as the Brexit vote - Britain’s decision to exit the European Union - that could derail Japan’s economy.

However, the premier has more recently affirmed that he intends to stick with the current timeframe to raise the tax rate in October 2019.

He has also pledged to take steps to mitigate any impact on the economy from the tax hike through measures such as tax breaks for durable goods purchases.

“Our basic stance is that we will proceed with the sales tax hike. But it’s wrong to be too rigid about this and raise the tax rate no matter what,” he told parliament.

Abe said he was committed to the sales tax hike next year but that such a decision could change if the economy was hit by a shock. He declined to say when he would make a final decision.

“We will proceed with the tax hike unless the economy is hit by a shock of the scale of the collapse of Lehman Brothers” in 2008, he said.

Raising the sales tax rate is a politically sensitive decision in Japan and has become more so after an increase to 8 percent from 5 percent in 2014 tipped the economy into a recession.

Some analysts speculate Abe may postpone the tax hike again, especially if he deemed it too politically risky ahead of an upper house election around mid-2019.

Escalating trade frictions and slowing Chinese growth has also darkened the outlook for Japan’s economy, which is showing increasing signs of peaking as output and exports slump.

Slow wage growth and the public’s sticky deflationary mindset have prevented the BOJ from achieving its 2 percent inflation target despite years of heavy money printing.

Additional reporting by Stanley White; Editing by Sam Holmes & Shri Navaratnam

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