TOKYO (Reuters) - The Bank of Japan has room to respond with monetary policy if a proposed sales tax hike hurts the economy, Governor Haruhiko Kuroda told a government panel on the tax, according to minutes released on Friday.
However, the BOJ does not expect the economy to worsen if the government sticks with its plan to raise the 5 percent sales tax to 8 percent in April and then to 10 percent in October 2015, minutes from the August 30 meeting showed.
Kuroda told panelists that if the plan was delayed and investors lost faith in Japan's fiscal policy it would be difficult to respond because the government would have to cut fiscal spending and central bank purchases of government debt would be less effective, according to the minutes.
Japan's outstanding debt recently passed 1,000 trillion yen ($10 trillion), which is the worst debt burden in the world at twice the size of its economy.
Policymakers should not assume that this debt-to-GDP ratio can continue to rise indefinitely, Kuroda said, according to the minutes.
Kuroda's comments in the minutes were similar to his remarks at a news conference on Thursday after the BOJ kept monetary policy on hold.
Prime Minister Shinzo Abe convened the panel to help him decide whether or not to change the schedule for the tax hikes, which will be used to fund welfare spending.
The panel, which included business leaders, economists and consumer advocates, recommended that the government stick with this plan and use some short-term stimulus to offset the blow, Abe will decide in early October.
Advocates say raising the tax would be an important first step in trying to lower public debt, which is the worst among industrialized countries at more than twice the size of Japan's economy.
However, close advisers to Abe and some ruling Liberal Democratic Party politicians oppose the idea, saying it will slow consumer spending and delay an escape from deflation.
Abe has made ending 15 years of deflation and revitalizing the economy among his top priorities.
In a bid to end deflation, the BOJ stunned markets in April by pledging to double its holdings of government bonds and boost purchases of risky assets to achieve its 2 percent inflation target in two years.
When Japan last hiked the sales tax from 3 percent to 5 percent in 1997, consumer spending tumbled by 13 percent in the quarter after the higher tax went into effect. That was followed by a recession.
($1 = 100.0350 Japanese yen)
Reporting by Stanley White; Editing by Kim Coghill