Japan's Abe is 'neutral' on raising sales tax
Prime minister facing tough decision as he seeks to curb debt without hurting economic recovery
Japanese Prime Minister Shinzo Abe remains "completely neutral" on whether to raise the national sales tax, Economy Minister Akira Amari said even as he expressed concern about the strength of economic recovery.
Abe faces a tough decision by the end of the year on whether to raise the tax for a second time - doubling the tax rate over 18 months - in a bid to curb Japan's runaway government debt.
The risks to his "Abenomics" strategy to reflate the long-moribund economy are increasing, whether Abe decides to go ahead with the tax or not. Raising the tax as recovery falters could send the economy into a tailspin, while delaying the move could shake investors' confidence in Japan's ability to repair its finances.
"I think he is completely neutral" on the decision, Amari said yesterday.
"The prime minister is carefully searching to find the most effective combination to achieve economic recovery, stability for the social-security system and fiscal reform."
Abe raised the tax to 8 per cent in April from 5 per cent. He will decide in December whether to raise it to 10 per cent in October next year. Economists generally expect he will raise the tax.
He said on Friday he would scrutinise various data, including the effect of bad summer weather and rising fuel costs on consumption, in deciding whether the economy is strong enough to endure a further tax increase.
Hit by the April tax increase, the Japanese economy shrank by a worse-than-expected annualised rate of 7.1 per cent in the second quarter from the previous three months, the deepest fall since January-March 2009, when the financial crisis hit Japan's exports and factory output.
"The recovery trend is certain," Amari said. "The July-September numbers should show a robust recovery. But I'm a little concerned that this robustness is a bit weak."
He said it would take time for a positive economic cycle to take hold as firms could not in a single year raise wages enough to compensate for the tax increase and inflation generated by Abe's growth policies, which aim to pull Japan out of 15 years of deflation and tepid growth.
Amari warned that excessive yen moves were undesirable for the economy, after the currency hit a six-year low of 110.09 against the US dollar.
But Bank of Japan governor Haruhiko Kuroda said the yen's weakening was broadly positive for Japan's economy if it reflected the underlying fundamentals.
While a weaker yen pushed up import costs and domestic prices, it also helped improve exporters' profits, Kuroda told lawmakers in parliament.
"If the yen weakens in line with the actual state of the economy, I don't think it will cause big problems," he said. "It's probably a plus on the whole."
