Oct. 1 (Bloomberg) -- Japanese Prime Minister Shinzo Abe proceeded with an April sales-tax increase and a 5 trillion yen ($51 billion) stimulus plan as he tries to rein in the world’s biggest debt burden without negating efforts to end deflation.
The levy will rise to 8 percent from 5 percent now, Abe, 59, said in Tokyo today, the first increase since 1997. To cushion the blow, he unveiled a package to be compiled in early December, which a Cabinet Office statement showed includes public works spending and tax breaks encouraging companies to boost capital spending and wages.
With households already hit by a rising cost of living and declines in pay, proceeding with the higher levy enacted by the previous government poses the biggest risk yet to Abe’s efforts to end two decades of Japanese stagnation. His next challenge in coming weeks is following through on pledges for domestic economic reforms that persuade companies to invest at home.
“The next focus is solely on the growth strategy,” said Naohiko Baba, chief Japan economist at Goldman Sachs Group Inc. The planned stimulus package will help safeguard the economy “from the risk of faltering under the weight of the sales tax,” he said.
The economy will contract an annualized 4.5 percent in the three months after the sales tax is increased in April before returning to growth, according to the median calculation of economists surveyed by Bloomberg News. For the 2014 calendar year, the expansion is seen slowing to 1.6 percent from 1.9 percent this year, the median estimates show.
“I believe it is possible to quickly put Japan back on a growth path -- because of this and to maintain trust in Japan and to hand to the next generation a sustainable social-security system, I have decided to raise the sales tax,” Abe said today.
Tailwinds for the world’s third-largest economy heading toward the April increase in duties reduce the danger of Abe following in the footsteps of Prime Minister Ryutaro Hashimoto, who in 1997 oversaw a 2 percentage point boost in the levy. The move cost him his job as Japan sank into a recession with consumption swooning against a backdrop of weakening demand abroad due to the Asian financial crisis.
Japan’s large businesses now are the most confident they’ve been since before the collapse of Lehman Brothers Holdings Inc. The Bank of Japan’s quarterly Tankan index for big manufacturers rose to 12 in September from 4 in June, exceeding the median estimate of 7 in a Bloomberg survey.
The Topix index of stocks fell 0.1 percent in Tokyo today, bringing its gains to 62 percent over the past year amid optimism that Abe’s policies will end the economy’s malaise.
The yen’s 21 percent slide against the dollar over the past year, propelled in part by monetary stimulus enacted by Abe’s pick for central bank chief, has helped stoke profits for exporters. The Japanese currency rose 0.4 percent to 97.88 against the dollar at 4:16 p.m. in Tokyo.
Abe is under pressure to keep a recovery going after the economy grew an annualized 3.8 percent in the second quarter, a third straight advance for gross domestic product. While consumer prices rose in August the most since 2008, the gains stemmed from higher energy costs that have squeezed households in the absence of wage increases.
A government report today showed that salaries in August extended the longest slide since 2010, with regular wages excluding overtime and bonuses falling 0.4 percent from a year earlier, a 15th straight drop. The figures underscore that companies have yet to grow confident enough about the outlook to start boosting compensation, even as they sit on what the BOJ calculated was 220 trillion yen in cash at the end of June.
To help unlock that money, Abe has aimed his third arrow of economic policy at growth-inducing reforms from trade liberalization to steps elevating the participation of women in the workforce. Abenomics has so far relied on the first two arrows -- of government spending and BOJ Governor Haruhiko Kuroda’s unprecedented commitment to achieve 2 percent inflation by increasing the supply of money.
“Our economy is showing signs of recovery thanks to our three-arrows policy. We have a chance of escaping deflation after 15 years and we must not let it slip away,” Abe said today.
Kuroda said last month that the central bank could take further action if its goal of engineering 2 percent inflation within about two years were imperiled.
With household spending compressed by falling pay, “the BOJ may be forced to lower its fiscal-year 2014 inflation forecast,” Credit Suisse AG economists in Tokyo led by Hiromichi Shirakawa wrote in a note last week. “The central bank may have little option but to announce additional easing measures in an attempt to fulfill its commitment to 2 percent inflation by fiscal-year 2015.”
The government wants to pay for the stimulus package with tax revenue and other means, without issuing additional bonds, Finance Minister Taro Aso told reporters.
The decision to increase the sales tax in April is credit positive for Japan, Thomas Byrne, senior vice president for sovereign risk at Moody’s Investors Service, told Bloomberg News today.
“That doesn’t mean we will upgrade Japan but we think it improves the government’s finances,” Byrne said.
Legislation passed by Abe’s predecessor called for the sales tax to rise to 8 percent in April and then to 10 percent in October 2015, pending a final decision by the prime minister. If the first step doesn’t go well, the next one would be scrapped, Economy Minister Akira Amari said over the weekend on Fuji Television.
“There is no next step but to wait for these policies to bring results,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute, before the announcement on the sales tax and the stimulus Abe will unveil later today. “Aggressive monetary easing has been implemented, public works will boost employment and tax incentives will be offered. We can only wait and see the outcome of these measures. Stimulus measures for the time being are sufficient.”
Abe, who took office in December after his Liberal Democratic Party resumed its nearly unbroken dominance of Japan’s politics in the postwar period, is trying to spur growth while putting the country’s finances on a sustainable footing. Public debt reached a record 1,008.6 trillion yen as of June 30, more than the economies of Germany, France and the U.K. combined.
Deflation has helped contain Japan’s borrowing costs even as public debt expanded. Yields on benchmark 10-year notes are about 0.68 percent, compared with 2.635 percent for U.S. Treasuries and 1.78 percent for German bunds.
“Backtracking now would really put in question the ability of the government, the ability politically of the government to move ahead with fiscal adjustment,” Jerry Schiff, the International Monetary Fund’s mission chief for Japan, told reporters in August, commenting on the sales tax increase.
The Washington-based IMF has urged Japan to go beyond the scheduled increases in the consumption levy, lifting it to “at least 15 percent” to bring down its public debt over the medium term.
Others advocate even stronger steps to prevent an eventual collapse in confidence in Japanese government bonds.
“It is our responsibility as politicians to raise it,” Takeshi Fujimaki, a former adviser to billionaire George Soros who is now a member of Japan’s upper house of parliament, said in an interview last month in Tokyo. His prescription: a rate of 35 percent to 40 percent.
To handle Japan’s rising welfare costs and rein in its debt, the consumption tax rate should rise to at least 20 percent by 2020, according to Takatoshi Ito, the head of a panel advising Japan’s Government Pension Investment Fund, the world’s biggest pension fund.
Elsewhere in Asia, a Chinese manufacturing gauge missed economists’ forecasts for September, while an Indian manufacturing indicator rose for the same period.
The Reserve Bank of Australia kept the cash rate target at a record low 2.5 percent as forecast by all economists surveyed by Bloomberg News.
The U.S. government began a partial shutdown for the first time in 17 years, putting as many as 800,000 federal employees out of work today, closing national parks and halting some government services after Congress failed to break a partisan deadlock.
To contact the editor responsible for this story: Paul Panckhurst at email@example.com