Japan Mulls Deficit Cut as Sales-Tax Debate Intensifies: Economy

Photographer: Yuriko Nakao/Bloomberg

Customers inspect rings on display at a jewelry store in Sapporo. Economy Minister Akira Amari told reporters late yesterday in Tokyo that “there is no option to not raise the consumption tax at all,” barring an external shock of a magnitude similar to the September 2008 global money-market breakdown. Close

Customers inspect rings on display at a jewelry store in Sapporo. Economy Minister... Read More

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Photographer: Yuriko Nakao/Bloomberg

Customers inspect rings on display at a jewelry store in Sapporo. Economy Minister Akira Amari told reporters late yesterday in Tokyo that “there is no option to not raise the consumption tax at all,” barring an external shock of a magnitude similar to the September 2008 global money-market breakdown.

Japan is considering an 8 trillion yen ($82 billion) target for budget-deficit cuts over the next two years as officials debate how to proceed with a sales-tax increase that threatens to damage an economic rebound.

The goal is based on the assumption that the consumption levy is raised as planned to 8 percent in April, from 5 percent now, according to two government officials who asked not to be named per government policy. Prime Minister Shinzo Abe’s administration plans to release its medium-term fiscal plans, and a final decision on the sales levy, later this year.

With a report today showing little sign of the wage gains Abe needs to bolster his reflation campaign, policy makers face the challenge of reining in the world’s largest public debt burden without derailing growth. Economy Minister Akira Amari said yesterday officials will canvass with “experts” on how to implement the tax hike enacted by the previous administration.

“It’s highly likely that Abe’s government will choose to lift the sales tax as planned,” said Akito Fukunaga, chief rates strategist in Tokyo at Royal Bank of Scotland Group Plc’s RBS Securities unit, one of the 24 primary dealers in Japanese government securities. “The amount of 8 trillion yen underlines that the government has no other choice,” given the difficulty in finding other means to make up the deficit cut, he said. The Asahi reported the 8 trillion yen figure earlier today.

The Topix index fell 0.4 percent as of 2:30 p.m. in Tokyo today as investors looked ahead to a U.S. Federal Reserve policy statement that may give more clues on when the Fed will trim $85 billion of monthly bond purchases.

‘No Option’

Amari told reporters late yesterday in Tokyo that “there is no option to not raise the consumption tax at all,” barring an external shock of a magnitude similar to the September 2008 global money-market breakdown. He said that economic expansion may slow next year due to the levy, then rebound after that.

Expert-produced studies showing varying impacts on the economy from scales of tax increases could help policy makers determine how much of a supplementary budget is needed to counter the hit, according to Fukunaga. Economists estimate the need for a 5 trillion yen package to cushion Japan from the move scheduled for April, a Bloomberg News survey showed this month.

The legislation approved under the former government allowed a delay in the two-step tax increase, which would bring the rate to 10 percent in 2015, depending on the state of the economy. Officials including Amari and Finance Minister Taro Aso have said the call will be made after the government’s second estimate of second-quarter gross domestic product, due Sept. 9.

Revenue Increase

The cabinet office estimated in August last year that a 1 percentage point increase in the tax would create about 2.7 trillion yen in extra revenue. RBS’s Fukunaga estimates that a 3 percentage point increase in the consumption tax will generate about 7 to 8 trillion yen.

In the fiscal year starting in April, the primary balance fiscal deficit will be 23.2 trillion yen, the finance ministry estimated in January.

Japan’s medium-term fiscal plan will be submitted to the Group of 20 nations meeting in early September, Aso said yesterday. Aso told his G-20 counterparts at a July 20 gathering in Moscow that his nation will craft a credible framework.

Political Pain

“Politicians are always very cowardly about things which will cause pain to the people,” former ruling party secretary-general and retired lawmaker Makoto Koga said in an interview yesterday. “Raising the sales tax is the first test of whether Abenomics can be successfully implemented. This is the first major test - I think they need to overcome it.’

Government debt will exceed 245 percent of GDP this year, according to the International Monetary Fund -- the legacy of deficit spending and two decades of malaise that has sapped tax revenue.

Bank of Japan Governor Haruhiko Kuroda this week indicated little concern that a sales-tax rise would derail the nation’s economic rebound.

‘‘A two-step sales tax increase won’t give major damage to growth in Japan’s economy,” Kuroda said in a speech in Tokyo, referring to the BOJ’s growth forecasts. “We consider a downturn in overseas economies to be the largest risk factor to the outlook for economic activity and prices.”

Japanese workers saw their wages rise 0.1 percent on average in June compared with a year before, after a 0.1 percent drop in May, a government report showed today. Abe has urged companies to boost compensation, as their profits improve with a more competitive exchange rate.

Wages, Manufacturing

A Japanese manufacturing index fell to 50.7 in July from 52.3 in June, Markit Economics said today.

Elsewhere in Asia, Taiwan’s economy grew by more than economists estimated last quarter as domestic consumption improved.

The U.S. economy probably grew at a 1 percent annualized rate from April through June, according to a Bloomberg News survey of analysts ahead of data to be released today. ADP Research Institute may say U.S. private employers added 180,000 jobs in July, a separate poll showed. Data are due on retail sales in Germany and Spain and inflation in the European Union.

To contact the reporters on this story: Kyoko Shimodoi in Tokyo at kshimodoi@bloomberg.net; Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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