Japan's tax, spending plan double-edged sword for central bank

Tue Oct 1, 2013 7:47pm EDT
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By Leika Kihara

TOKYO (Reuters) - The Japanese prime minister's policy mix announced on Tuesday of giving to the economy on the one hand and taking away with the other is set to complicate life for the central bank next year.

It had already factored in an increase in the national sales tax to 8 percent from 5 percent from April 2014. Prime Minister Shinzo Abe confirmed the rise on Tuesday.

But Abe also said most of the extra revenue initially raised from the higher sales tax would end up back in the economy through a stimulus package amounting to about $50 billion, a move designed to offset the economic blow of increasing the tax.

That is likely to result in the Bank of Japan (BOJ) increasing its already rosy long-term growth and inflation forecasts, sources familiar with the bank's thinking said.

Still, the impact of the sales tax is an unknown. Economists expect it to deal an initial blow to the economy, which could easily place the BOJ under political pressure to ramp-up its stimulus yet further to ensure the economic feel-good factor - central to Abenomics - continues.

The last time that Japan raised its sales tax - to 5 percent from 3 percent in 1997 - the economy spiraled into recession. Although other factors were at play at that time, lawmakers may be jumpy next year if data shows the economy is starting to slide.

"Even with the stimulus package, Japan's economy won't be able to escape a contraction in the second quarter of 2014 after the tax hike," said Masaaki Kanno, chief Japan economist at JPMorgan Securities.

"The BOJ is highly likely to ease monetary policy in April next year to support the economy and accelerate inflation, which won't be picking up much by then."   Continued...

A pedestrian holding an umbrella walks past the Bank of Japan (BOJ) headquarters in Tokyo, in this August 8, 2013 file picture. REUTERS/Yuya Shino/Files