Economic growth of 2 percent this quarter will be enough to allow Prime Minister Shinzo Abe to proceed with an increase in the sales tax to 10 percent next year, a survey by Bloomberg News shows.
Abe’s government has indicated he’ll make a decision in December after examining data for the three months through September. Economists in a separate poll project growth this quarter at 2.4 percent on an annualized basis.
Raising the levy is critical for Japan to combat the world’s heaviest public debt burden, even if it harms low-income households, according to the International Monetary Fund. Abe’s task is to instill confidence in companies and consumers to keep spending after raising the tax by 3 percentage points in April.
“He probably has no chance of postponing the tax increase,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. “The stock market is very likely to fall if the hike is delayed because investors will take it as a sign Abe has no ability to push through fiscal reforms.”
The Topix (TPX) index of stocks rose 5 percent last quarter on signs the economy is weathering the sales-tax increase and optimism the national pension fund will buy more domestic stocks. The benchmark gauge rose 0.3 percent in morning trading after U.S. stocks rallied on deals and earnings reports.
Thirteen of the 33 economists in the survey said expansion of 2 percent was needed for the government to increase the sales tax. This figure was also the median estimate.
Seven said expansion of less than 2 percent would be sufficient, six stated that 2.5 percent or more was necessary and four expected Abe to proceed regardless of the growth rate.
The government will probably boost spending to cushion the tax blow, with the median estimate for 3 trillion yen ($29.5 billion) of fiscal assistance, according to the survey.
This compares with a 5.5 trillion yen package when the tax rose to 8 percent from 5 percent in April. Even with this stimulus, the economy is projected to have contracted 4.9 percent in the April-June period.
Japan’s revised third-quarter gross domestic product data will be released on Dec. 8.
The IMF estimates Japan’s public debt at 242 percent of gross domestic product this year. The Ministry of Finance projects the burden will reach 1,144 trillion yen by the end of March 2015.
Fitch Ratings Ltd. said last month that the nation has no “Plan B” for public debt and that failure to increase the sales tax could prompt a cut in Japan’s sovereign rating.
The government needs to consider what they’ll do after raising the tax to 10 percent to maintain the nation’s welfare system, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo.
“An increase in the sales tax to at least 20 percent may be needed,” Kanno said. “The government will need to discuss this issue from the perspective of spending as well as the sales tax.”
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