Japan PM Abe moves toward tax hike, orders economic stimulus

Tax hike seens as first meaningful step to contain its ballooning public debt

Japanese Prime Minister Shinzo Abe ordered his government on Tuesday to craft measures to bolster the economy to cushion the impact of an increase in the national sales tax.

Buoyed by data showing the world's third-biggest economy recovering briskly and a successful trip to secure the rights to host the 2020 Olympic Games, Abe wasted no time in preparing the groundwork for the April tax increase.

He told cabinet ministers to "compile strong measures as a package, including growth strategies, by the end of this month," Economy Minister Akira Amari told reporters.

The timing means the measures will be decided by October 1, when the premier is to formally rule on the tax increase, Tokyo's first meaningful step to contain its ballooning public debt - considered key to maintaining investor confidence.

Abe is proceeding cautiously as many politicians blame the last tax hike, in 1997, for plunging the country into recession. The economy has improved smartly since Abe came to office in December on a platform of fiscal stimulus, monetary easing and growth-promotion measures, but the rebound remains fragile.

Still, the spending package, likely to exceed $20 billion, and measures including corporate tax relief show that Abe is moving toward the tax hike - the first stage in a planned doubling of the levy to 10% over two years.

Strong economic data have weakened the position of Abe's outside advisers who argue Japan should more decisively escape from deflation before the government raises the sales tax.

"Apart from whatever the prime minister is thinking, the mood is certainly forming that the tax increase is unavoidable," said a person close to a senior ruling party official.

Abe did not specify the size of the stimulus but said it would need to be enough to counter the economic drag of the tax increase, Amari said. That means the package must be 2 trillion yen or more, Amari has said previously.

The premier is trying to balance his top priority of ending 15 years of deflation and tepid growth against the need to get a grip on Japan's public finances. At more than double annual GDP, Japan's public debt is the biggest in the industrial world.

The bond market has long given Tokyo the benefit of the doubt, but policymakers fear that any concerns over Japan's commitment to fiscal reform would crush bond prices and send interest rates spiking.

The government on Monday sharply raised its estimate for second-quarter economic growth to an annualised 3.8% from the previous three months. The numbers included a sharp improvement in corporate investment in equipment and software, considered vital for a durable recovery.

Finance Minister Taro Aso, a major proponent of the tax hike, said Japan's improving indicators showed there would be no problem in raising the sales tax as scheduled.

A law passed last year calls for the government to raise the sales tax, similar to a goods-and-services tax in other countries, to 8% in April and to 10% in October 2015. But the law requires the government to confirm that the economy is strong enough to weather the blow.

"The law clearly says the tax will rise by 3%age points and then by 2 percentage points, so government ministries will be operating under this assumption when they start thinking about steps to offset the damage from the tax hike," Aso said.

The package also is expected to include payments to lower-income people to promote housing purchases and long-discussed tax breaks for companies that increase capital spending, said a government source involved in the process.

Detractors losing steam

The timing for a tax cut will hardly ever be better.

In addition to "Abenomics" boosting growth and the Olympic win providing a feel-good factor and hopes of more economic activity, Abe's ruling coalition secured full control of the legislature in a July election and has three years until the next polls.

Aso, a former premier, and Bank of Japan Governor Haruhiko Kuroda have come out strongly for the tax increase. A panel set up by Abe, as well as his party's tax commission, have signed off on the hike and turned their focus to economic measures to blunt the negative impact on growth.

Japan's top business lobby, Keidanren, has also thrown its weight behind the tax hikes, arguing that backtracking would hit business confidence and lead to market turmoil.

Still, Koichi Hamada and Etsuro Honda, two academic economists credited for shaping Abe's reflationary thinking, argue that Japan's recovery was still missing critical components such as sustained increases in wages, corporate investment and consumer prices.