Politics
By Stanley White and Izumi Nakagawa
TOKYO, Aug 2 (Reuters) - The Japanese economy can withstand a planned sales tax increase even if growth slows from the first quarter's healthy pace, economists said in a Reuters poll, offering support for the contentious fiscal reform, the biggest in decades.
Prime Minister Shinzo Abe, who has made economic recovery and the defeat of deflation his top priority, has ordered his government to consider alternatives to the planned two-stage doubling of the sales tax over two years. This raises the possibility that he might water down or delay the move.
But 14 of the 15 economists and analysts in the Reuters poll say Abe should go ahead as planned with the first stage, raising the 5 percent tax to 8 percent in April.
This is meant to be the first step towards fixing Japan's public debt, which at more than double annual GDP, is the biggest burden in the industrial world. The levy is scheduled to rise to 10 percent a year later.
"We need the sales-tax increase because this is a promise made to maintain our deficit-reduction goal and guarantee sustainable fiscal policy," said Yoshimasa Maruyama, chief economist at Itochu Economic Research Institute.
"This will lower the risk of a spike in long-term yields, which will contribute to economic growth."
Top tax officials in Abe's Liberal Democratic Party and its junior coalition partner told Reuters on Wednesday that the premier will stick with this schedule. This is despite calls from some of his advisers to phase in the tax increase more gradually or even delay it until strong growth is sustained for several quarters and employment improves markedly.
The coalition parties and the previous ruling party agreed last year to the tax-hike schedule, but the tax-hike law requires the government to gauge the economy's strength before proceeding with the plan.
Government officials say Abe will look at revised April-June GDP, due on Sept. 9 and other data before deciding on the tax hike by early October.
One respondent to the poll, carried out from last Friday to Tuesday, said the government should raise the tax by a percentage point each year - one of the alternatives the government will consider - if there has not been enough progress in escaping deflation.
April-June growth is expected to slow only slightly from the first quarter's annualised pace of 4.1 percent, the best among the Group of Seven industrial powers. But most of the economists said the government should go ahead with the tax hike as long as April-June GDP expands at around a 1-to-2 percent clip.
Even if the sales tax rises to 10 percent, this would still be only a small step toward fiscal rebuilding, as many economists have said the rate needs to rise to 20 percent or more.
Should the government stumble at the first step towards higher taxes, long-term bond yields could rise somewhat on worries about the fiscal deficit, the poll showed.
"If the government delays the tax hike once, it will be difficult to regain the market's trust," said Takafumi Yamawaki, chief rates strategist at JPMorgan. "The government would need to present a fairly detailed plan on fiscal rebuilding."
Nine respondents said the government should take some temporary measures to offset the impact of the sales tax hike, with the most popular options being improving the government's growth strategy and extending tax breaks for home and auto purchases.
Only two of the 15 surveyed called on the government to spend more on public works such as roads, bridges and dams - the stimulus measures favored by LDP governments for decades.
Five respondents said that a crucial factor in the government's decision on raising the sales tax should be how the U.S. economy fares, and four cited China's economic outlook as pivotal. (Editing by Richard Borsuk)
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