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

Tue Oct 1, 2013 6:15am EDT
 
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By Tetsushi Kajimoto and Stanley White

TOKYO (Reuters) - Japan's Prime Minister Shinzo Abe took a step on Tuesday 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 will raise the national sales tax to 8 percent in April from 5 percent.

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 worth 5 trillion yen or more, according to a final draft seen by Reuters.

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.

Japan's budget deficit is around 10 percent of GDP, huge for a country not in financial crisis. The debt pile grows every year by nearly the size of the combined GDP of Greece, Portugal and Ireland.

Yet, successive governments have done little to rein in spending and Abe 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.   Continued...

 
Japanese Prime Minister Shinzo Abe speaks at a news conference in New York September 27, 2013. REUTERS/Eric Thayer