Kuroda Backs Sales-Tax Increase Before Panels Weigh Impact

Bank of Japan Governor Haruhiko Kuroda said Japan’s economy is strong enough to withstand a planned sales-tax increase, backing the measure before panels meet next week to study the impact on growth.

The economy won’t lose speed if the sales tax is raised as planned, Kuroda told the Mainichi newspaper in an interview published today. If a higher levy or changing conditions overseas heighten the risk of a slowdown, the central bank “won’t hesitate” to add to its unprecedented easing policy, Kuroda said, according to the report.

Kuroda has advocated steps to cut Japan’s debt burden, the largest in the world, even as he tries to steer the economy out of 15 years of deflation. Morgan Stanley MUFG Securities Co. said today that Prime Minister Shinzo Abe is likely to abandon plans to raise the sales tax to 8 percent from 5 percent in April and instead ratchet it up 1 percentage point a year, a move that would soften the blow to consumption.

“Kuroda’s comments suggest he really wants an increase in the sales tax as scheduled,” said Yuichi Kodama, chief economist in Tokyo at Meiji Yasuda Life Insurance Co. “Fiscal reform is needed for Japan’s economy.”

Academics, economists, business leaders and others will hold meetings Aug. 26-31 on the levy and Abe is due to make a decision during the autumn.

Beating Deflation

Kuroda will attend the panel meetings, along with Finance Minister Taro Aso and other members of the economic and fiscal policy council, the Cabinet Office said yesterday. Koichi Hamada and Etsuro Honda, two advisers to Abe who have urged caution on lifting the sales tax, are among the panel members.

The sales tax will rise to 10 percent in 2015 in the two-step increase planned under current legislation.

Kuroda this month warned against any delay, saying “ending deflation and raising the sales tax are achievable at the same time.”

The austerity measure would deal a short-term blow to the economy, which has so far recovered under the reflationary policies of Abenomics centered on monetary and fiscal stimulus and regulatory steps to boost growth.

Gross domestic product will contract at an annualized 4.3 percent in the April-June quarter next year before rebounding, according to the median forecast of economists surveyed by Bloomberg News.

Cautious Advisers

The BOJ in July forecast real gross domestic product would grow 1.3 percent in the fiscal year starting April 2014 and expand 1.5 percent in the following year, according to median estimates of the central bank’s board members.

The BOJ aims to generate 2 percent inflation in Japan over a two-year time frame. Consumer prices excluding fresh food rose 0.4 percent in June from a year earlier, the most since 2008.

Kuroda said in the Mainichi interview he couldn’t specify what sort of additional steps the BOJ might take if it needed to ease further.

Abe adviser Honda, a professor at Shizuoka University, proposed lifting the tax by 1 percentage point a year in an interview this month. There was a serious risk a sales-tax increase would halt the positive trend from Abenomics, Hamada, a retired Yale University professor, said this month.

Aso said last week that data showing the economy grew at an annualized 2.6 percent in the second from the first quarter supported the case for increasing the sales tax.

Japan’s gross public debt could reach almost 248 percent of annual gross domestic product next year, the International Monetary Fund projected this month, an increase of 10 percent from 2012.

Japan should adopt “a credible medium-term fiscal plan” as quickly as possible, and needs “growth-friendly revenue and expenditure measures” in the medium term to bring down its debt-to-GDP ratio, the IMF wrote in the report.

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