Aso Signals Japan Prepared to Boost Stimulus for Growth

Photographer: Tomohiro Ohsumi/Bloomberg

Taro Aso, Japan's deputy prime minister and minister for finance and financial services. Close

Taro Aso, Japan's deputy prime minister and minister for finance and financial services.

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Photographer: Tomohiro Ohsumi/Bloomberg

Taro Aso, Japan's deputy prime minister and minister for finance and financial services.

The Abe administration gave its clearest signal yet of concern about damage to the economy from this year’s sales-tax increase, with the finance minister saying that a back-up plan for stimulus will be prepared.

“The economy is constantly changing and we need to prepare to be able to react immediately,” Taro Aso, who also serves as deputy prime minister, told reporters in Tokyo. “A supplementary budget is one method.”

Japan’s two-decade battle against stagnation highlights the risks of falling prices for major economies as European Central Bank President Mario Draghi planned fresh easing to revive the euro area. Prime Minister Shinzo Abe is weighing whether to increase the sales levy a second time to control debt as Japan struggles to rebound from the steepest contraction since the 2011 earthquake.

“Abe won’t allow the economy to lose momentum because growth is a priority,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo. “The government will work out a stimulus package to support the economy as it’s important to raise the sales tax to 10 percent as planned.

The government is trying to rein in the world’s biggest debt burden while stoking a recovery. The prime minister said he’d decide by the end of the year whether to boost the levy in October 2015, after he reshuffled his Cabinet this week.

Any decision to take the tax higher would be accompanied by more stimulus, Economy Minister Akira Amari said.

‘‘We will decide more cautiously than before whether to raise the sales tax,” Amari said. “In order to minimize the impact of a sales-tax increase, we may take action.”

BOJ Pressure

The Topix (TPX) index of shares fell 0.3 percent today, after swinging between gains and losses as the yen dropped to an almost six-year low after the ECB’s decision to cut interest rates and start buying assets. The yen later strengthen and was up 0.1 percent at 105.19 per dollar at 6:04 pm. in Tokyo. The benchmark 10-year government bond yield rose 0.5 basis point to 0.535 percent.

Bank of Japan Governor Haruhiko Kuroda kept pressure on the government to press ahead with fiscal consolidation, saying yesterday it was vital for the future of Japan’s economy. He also signaled that the central bank had the means to offset the blow from a higher sales tax.

“There is a way to deal with the consequences of proceeding with the sales-tax increase,” Kuroda said.

Debt Burden

The government will probably boost spending by 3 trillion yen ($28 billion) to cushion the blow from the tax hike, according to the median estimate of economists in a Bloomberg News survey in July. Thirteen of the 33 economists in the survey said an economic expansion of 2 percent was needed for the government to opt for a further increase the sales tax.

It announced a 5 trillion yen stimulus package in October last year to help the economy overcome the increase in the levy to 8 percent in April.

Japan’s public debt will be equivalent 243.5 percent of its economy this year, according to the International Monetary Fund. The Ministry of Finance projects the burden will reach 1,144 trillion yen by the end of March 2015.

Household spending and industrial production were weaker than forecast in July while auto sales tumbled to a three-year low in August, pointing to weakness this quarter after the economy shrank an annualized 6.8 percent in the three months after the sales-tax increase. Housing starts dropped for a fifth straight month in July.

While wages rose 2.6 percent in July from a year earlier -- the fastest pace since 1997 -- inflation including the higher levy was 3.4 percent, eroding households’ purchasing power.

Draghi signaled at least 700 billion euros ($905 billion) of fresh aid for Europe’s moribund economy and left a fight with Germany over sovereign-bond purchases for another day.

Pledging to “significantly steer” the ECB’s balance sheet back toward the 2.7 trillion euros of early 2012 from 2 trillion euros now, the ECB president yesterday announced a final round of interest-rate cuts and a plan to buy privately owned securities.

To contact the reporter on this story: Masaaki Iwamoto in Tokyo at miwamoto4@bloomberg.net

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net Arran Scott

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