Japan Readies Stimulus to Cushion Blow of Sales-Tax Increase

Japan will prepare a stimulus package this month to counter the blow to the world’s third biggest economy from a planned sales-tax increase.

“Prime Minister Shinzo Abe ordered that an economic package be compiled by the end of September,” Finance Minister Taro Aso told reporters in Tokyo today. “Sufficient stimulus is needed so that if the tax is increased as planned, it doesn’t break the economy.”

Abe will decide Oct. 1 whether to go ahead with an increase in the levy, which would help the government deal with the world’s largest debt burden. Increasing the tax could push the economy into contraction, damaging an effort to end 15 years of deflation and strengthening resistance to Abe’s plans to boost growth by cutting regulations and opening Japan more to international trade.

“Politically, it’s unavoidable to have an economic package to cushion the impact of a sales-tax increase,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. “If public support for Abe’s Cabinet falls due to a higher sales tax, it would be difficult for the administration to push through the growth strategy.”

The government will probably need a supplementary budget of about 4 trillion to 5 trillion yen ($50 billion) to pay for the package, Kodama said.

Austerity

Additional fiscal spending will put at risk Japan’s effort to cut its primary budget balance deficit by the fiscal year starting in April 2015 to half the level in 2010, said Azusa Kato, economist at BNP Paribas SA.

“Having said that, we expect the government to prepare as much as 10 trillion yen in such stimulus, half of which will be in public works spending,” Kato said. “We expect corporate capital spending tax cuts to be included.”

The primary balance deficit will amount to 2 percent of gross domestic product in fiscal 2020 unless the government can further improve its finances, according to Cabinet Office documents released in August. The primary balance is net government borrowing excluding interest payments.

A package of more than 2 trillion yen may be needed to counter the effects of a sales-tax increase, Economy Minister Akira Amari said yesterday.

Contraction

Japan’s economy will contract an annualized 4.4 percent in the three months starting April after six straight quarters of expansion, before returning to growth, according to the median estimate of economists surveyed by Bloomberg.

BOJ Governor Haruhiko Kuroda said last week the BOJ could take appropriate steps if a higher sales tax jeopardizes the central bank’s 2 percent inflation target.

Under legislation passed last year by Abe’s predecessor, the sales tax will rise to 8 percent in April from 5 percent now, and then increase to 10 percent in October 2015. Abe, who will make a final call on the plan, will consider business confidence data on Oct. 1 and second-quarter economic data in making his decision.

Japan’s gross domestic product grew more than initially estimated in the second quarter as business investment rose for the first time in six quarters, the Cabinet Office said yesterday.

Even with a higher levy, the central bank forecast the economy will grow 2.8 percent this fiscal year through March, and 1.3 percent the following year, according to the median estimate of the board members released in July.

Japan’s outstanding public debt including borrowings rose to a record 1,009.6 trillion yen as of June 30, the finance ministry said last month. Larger than the economies of Germany, France and the U.K. combined, the amount includes 830.5 trillion yen in government bonds.

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Kyoko Shimodoi in Tokyo at kshimodoi@bloomberg.net

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

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