October 5, 2014 / 12:37 AM / 3 years ago

Japan PM still 'neutral' on tax hike but recovery weak: economy minister

Japan's Economics Minister Akira Amari poses for a photograph during a Thomson Reuters Newsmaker event in Tokyo July 11, 2014.Toru Hanai

TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe remains "completely neutral" on whether to raise the national sales tax, Economy Minister Akira Amari said on Sunday even as he expressed concern about the strength of the country's economic recovery.

Abe faces a tough decision by year's end 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 the recovery falters could send the economy into a tailspin, while delaying the move could shake investors' confidence in Japan's ability to repair its tattered finances.

"I think he is completely neutral" on the decision, Amari told a talk show on public broadcaster NHK.

"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 percent in April from 5 percent. He says he will decide in December whether to proceed with a plan to raise it to 10 percent in October 2015. Economists generally expect he will raise the tax.

The premier said on Friday he will scrutinize various data, including the effect of bad summer weather and rising fuel costs on consumption, in deciding whether the world's third-biggest economy is strong enough to endure a further tax increase.

Hit by the April tax hike, the economy shrank by a worse-than-expected annualized rate of 7.1 percent in the second quarter from the previous three months, the deepest fall since January-March 2009, when the global financial crisis hit Japan's exports and factory output.

GDP is expected to claw back 3.6 percent in the July-September quarter, a Reuters poll found last month, before another run of bleak data was released.

"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 will take time for a positive economic cycle to take hold as companies cannot in a single year raise wages enough to compensate for the tax increase and the inflation generated by Abe's growth policies, which aim to pull Japan out of 15 years of deflation and tepid growth.

Writing by William Mallard; Editing by James Dalgleish & Kim Coghill

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