Japan PM orders study of impact of sales tax alternatives sources

Written by Reuters | TOKYO | Updated: Jul 29 2013, 21:54pm hrs
Japan pmJapan's Prime Minister Shinzo Abe speaks during a news conference at his official residence in Tokyo in this March 15, 2013 file photo. Japan's most significant fiscal reform in years - a planned increase in the country's sales tax - could be delayed or watered down in a move that might rattle financial markets and amount to an own goal for the prime minister. Despite holding the strongest political mandate of any prime minister in years, there are signs Abe is seriously rethinking the plan out of concern it could derail a nascent economic recovery he has crafted with an aggressive policy mix, dubbed Abenomics.(REUTERS)
Japanese Prime Minister Shinzo Abe has ordered a study of the economic impact of various alternatives for implementing a planned sales tax increase, including a plan for more gradual 1 percent annual rises, government sources familiar with the situation said over the weekend.

The intent of the study, the sources said, is not to promote the adoption of an alternative to the existing sales tax plan, which Finance Minister Taro Aso has said will be implemented as is.

Rather, the aim is to guide the government in deciding how best to cope with the impact of the tax increase, including adopting a supplementary budget, as it tries to balance its countervailing goals of reining in a bloated public debt while pulling the economy from its decades-long deflation.

Abe has said he will decide this autumn how to proceed with the sales tax increase. The Abe government's aggressive reflationary policies, dubbed "Abenomics", have spurred one of the stock market's sharpest rallies in decades but doubts linger whether it can achieve a sustainable recovery, with wages and jobs data yet to show convincing gains.

Three sales tax scenarios will likely be reviewed by the Council on Economic and Fiscal Policy, a panel of top government and private sector officials, and possibly by a separate, newly established panel of experts as well, the sources said. Their discussions will include an examination of second-quarter GDP data, due for release on Aug. 12.

The three scenarios include: the plan under current law to raise the sales tax rate to 8 percent from 5 percent in April 2014 and further to 10 percent in October 2015; to raise the rate by 2 percent in the first step, and in increments of 1 percent thereafter; and, to raise it 1 percent annually.