Abe takes bold tax step towards cutting debt

Japanese Prime Minister Shinzo Abe took a step yesterday that none of his predecessors had managed in more than 15 years - making a dent in the government's runaway debt.

Abe, riding a wave of popularity with economic policies that have begun to stir the world's third-biggest economy out of years of lethargy, said the government would raise the national sales tax to 8 per cent in April next year from 5 per cent.

But at the same time he softened the blow to the nascent recovery. As the tax increase is set to raise eight trillion yen (HK$634 billion) a year, Abe also announced an economic stimulus package worth five trillion yen.

"It is my government's responsibility to have Japan's economy regain hope, vigour and confidence for growth, while at the same time maintaining trust in the country, as well as securely passing on the social security system to the next generation," Abe said in a nationally televised news conference.

The tax increase marks the first serious effort since 1997 to rein in Japan's public debt, which recently blew past 1,000 trillion yen. At more than twice the size of the economy, this is the heaviest debt load in the industrial world. The country also runs a huge annual budget deficit of 10 per cent of gross domestic product.

Yet, successive governments have done little to rein in spending. As Abe is watering down the impact of the tax increase and has yet to address an explosion of social-welfare spending, critics doubt yesterday's move will be enough to get Japan on track to achieve its goal of halving the budget deficit by 2016.