In historic step, Japan PM to hike tax; will cushion blow to economy

Mon Sep 30, 2013 8:27pm EDT
 
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By Shinji Kitamura and Takaya Yamaguchi

TOKYO (Reuters) - Japan's Prime Minister Shinzo Abe will take a step on Tuesday that none of his predecessors has tried 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, will announce that the government will raise the national sales tax to 8 percent in April from 5 percent, a final draft of the government economic plan, seen by Reuters, shows.

But at the same time he will soften the blow to the nascent recovery. As the tax increase is set to raise an additional 8 trillion yen ($81.42 billion) a year, Abe will also announce an economic stimulus package that, according to the draft, is worth 5 trillion yen.

A source involved in the process said the size of the package could increase somewhat, depending on how some corporate tax issues are dealt with.

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 ($10.18 trillion). At more than twice the size of the economy, this is the heaviest debt load in the industrial world.

The government has done little to rein in spending and is watering down the impact of the tax hike, so some critics doubt Tuesday's move will be enough to get Japan on track to achieve its goal of halving the budget deficit - excluding debt service and income from debt sales - by the fiscal year to March 2016 and balance it five years later.

"Even if Abe's policies go well, we still will not eliminate the primary budget deficit," said senior Standard & Poor's official Takahira Ogawa.

"It will just slow the pace of growth in outstanding debt and slow the pace of budget-deficit growth, but things would still be deteriorating," Ogawa, the ratings firm's Tokyo-based director of sovereign ratings, told reporters last week.   Continued...

 
Japan's Prime Minister Shinzo Abe attends a seminar on Japan-UK security cooperation in Tokyo September 30, 2013. REUTERS/Issei Kato