Kuroda Sees Japan Economy Weathering Planned Sales-Tax Rise
“A two-step sales tax increase won’t give major damage to growth in Japan’s economy,” Kuroda said in a speech today in Tokyo, referring to the BOJ’s growth forecasts. “We consider a downturn in overseas economies to be the largest risk factor to the outlook for economic activity and prices.”
The comments are Kuroda’s most direct yet on the potential impact of a boost in the levy, weeks before officials decide whether to go ahead with the first step -- raising it to 8 percent in April from the current 5 percent. While Finance Minister Taro Aso has said the government needs to proceed, Abe advisers including Koichi Hamada have expressed caution.
“The BOJ wants sales tax increases as it views them as a stabilizer for long-term yields,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo. “Kuroda is mindful that his massive easing will be meaningless if the market loses faith in Japanese government bonds.”
Any jump in concern about the sustainability of Japan’s public debt burden -- the world’s largest -- would add to pressure on a government debt market already facing the prospect of the end of 15 years of sustained consumer-price declines. Kuroda in April unleashed unprecedented monetary stimulus to rekindle inflation, which undermines the value of bonds’ fixed payments.
Japanese shares fell today, with the Topix index capping the biggest two-day loss in two months, tumbling 3.3 percent today. The yen was 0.2 stronger at 97.97 per dollar at 5:29 p.m. in Tokyo, after earlier touching a one-month high. The benchmark 10-year bond yield was at 0.795, up 1 basis point.
Kuroda was previously a senior bureaucrat in Japan’s finance ministry, which has pushed for the sales tax to be lifted to help the government rein in its debt.
Abe has instructed his government to study the impact to the economy of various options for the sales tax, the Nikkei reported last week. The four options include raising it as planned, and freezing the tax for the time being, the newspaper said. The government currently plans to increase the tax to 8 percent in April next year, and then to 10 percent in October 2015. Chief Cabinet Secretary Yoshihide Suga said today the decision will come before the start of the autumn session of parliament, which has yet to be announced.
Even with a tax rise, the central bank expects real gross domestic product to expand 1.3 percent in the fiscal year starting in April, according to the median estimate of the nine policy board members released earlier this month.
Cushioning the economy from the blow to personal consumption from the tax hike could cost 5 trillion yen ($51 billion) in additional stimulus, according to the median forecast of 23 economists in a Bloomberg News survey last week.
Abe’s government will probably decide to change the implementation of the tax rise to 1 percentage point a year, Robert Feldman, head of Japan economic research at Morgan Stanley MUFG Securities Co. said in a report today, as a big tax hike “might derail the deflation-exit agenda.” In addition, “by reducing the consumption tax hike and thus reducing the hit to the economy, Prime Minister Abe will reduce the need for any special budget,” Feldman said.
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