Bank of Japan Governor Haruhiko Kuroda, seeking to overcome doubts about whether his nation should proceed with a sales-tax increase, signaled policy makers can act if needed with fiscal and monetary measures.
If the tax move had a big effect on the economy, “fiscal policy can respond and if downside risks materialize to the 2 percent inflation target, we will of course take appropriate steps,” Kuroda said today at a press briefing in Tokyo after the BOJ left policy unchanged. The central bank is targeting 2 percent price increases.
With the levy increase scheduled for April set to deal a blow to consumption and growth, most economists in a Bloomberg News survey forecast that Kuroda will add to easing in the first half of next year. The BOJ upgraded its assessment of the economy today, adding to signs of strength as Prime Minister Shinzo Abe weighs a decision on a higher tax, intended to help tackle the nation’s swelling debt load.
“Raising the consumption tax is a done deal from a market perspective,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank Ltd. “Consumption is bound to contract after last-minute buying ahead of the tax increase, and some sort of incentive for companies and households will be needed.”
The Topix index closed up 0.1 percent, while the yen fell 0.1 percent to 99.87 per dollar as of 6:20 p.m. in Tokyo.
Increasing the levy on consumption won’t “break the economy,” Kuroda said, adding that growth will continue to exceed the potential rate.
“The upgraded economic assessment suggests that the BOJ may be trying to send a tacit message that the sales tax should be raised as planned,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
The central bank said today that a moderate recovery is underway. It stuck with a plan to expand the monetary base at an annual pace of 60 trillion yen ($602 billion) to 70 trillion yen. All 32 economists in a Bloomberg News survey forecast the outcome.
Consumer prices climbed the most in five years in July as energy costs rose, and data next week may show Japan’s economic expansion accelerated last quarter.
Kuroda indicated today that a delay in raising the sales tax could undermine confidence in Japan’s fiscal sustainability and lead to higher government bond yields. The central bank committed in April to double the monetary base through purchases of government bonds and other financial assets, aiming to generate 2 percent inflation in about two years.
The sales tax is set to rise to 8 percent in April and 10 percent in October 2015 under legislation passed last year by Abe’s predecessor. Abe can delay or abandon the plan based on his assessment of whether the economy can withstand the blow.
While Kuroda and Finance Minister Taro Aso have indicated support for a sales-tax increase as planned, those cautioning that the economy isn’t ready to absorb such a blow include Abe’s advisers Koichi Hamada and Etsuro Honda.
Alexander Kinmont, the founder and head of Tokyo-based Milestone Asset Management Co., which manages about $65 million of Japanese equities, said today that the government risks an unforced error by proceeding with a tax increase rather than waiting for a strengthening economy to deliver more revenue.
Postponing the move could push the Nikkei 225 Stock Average up by as much as 2,000 points, while pressing ahead would be “very negative” for the Abenomics project of reflating the economy, said Kinmont, formerly a managing director of Japan equity strategy at Morgan Stanley MUFG Securities Co. The Nikkei closed at 14,064.82 today, up 35 percent this year.
That view contrasts with a majority of economists in a Bloomberg News poll saying that a delay would have a large and negative effect on Japan’s financial markets.
Economists forecast the economy to continue expanding through March next year before contracting an annualized 4.4 percent on quarter in the April-to-June period, according to a Bloomberg survey.
“Please don’t be disappointed yet that the impact of easing hasn’t appeared in the real economy,” BOJ Deputy Governor Kikuo Iwata said on Aug. 28. The central bank’s easing is “still in its early stages, and I hope you will be patient enough to see its effects permeate the economy.”