Japan PM Abe moves toward tax hike, orders economic stimulus

TOKYO (REUTERS) - Japanese Prime Minister Shinzo Abe ordered his government on Tuesday to craft measures to bolster the economy to cushion the impact of an increase in the national sales tax.

Buoyed by data showing the world's third-biggest economy recovering briskly and a successful trip to secure the rights to host the 2020 Olympic Games, Mr Abe wasted no time in preparing the groundwork for the April tax increase.

He told cabinet ministers to "compile strong measures as a package, including growth strategies, by the end of this month," Economy Minister Akira Amari told reporters.

The timing means the measures will be decided by October 1, when the premier is to formally rule on the tax increase, Tokyo's first meaningful step to contain its ballooning public debt - considered key to maintaining investor confidence.

Mr Abe is proceeding cautiously as many politicians blame the last tax hike, in 1997, for plunging the country into recession.

The economy has improved smartly since Mr Abe came to office in December on a platform of fiscal stimulus, monetary easing and growth-promotion measures, but the rebound remains fragile.

Still, the spending package, likely to exceed US$20 billion (S$25.4 billion), and measures including corporate tax relief show that Mr Abe is moving toward the tax hike - the first stage in a planned doubling of the levy to 10 per cent over two years.

Strong economic data have weakened the position of Mr Abe's outside advisers who argue Japan should more decisively escape from deflation before the government raises the sales tax.

"Apart from whatever the prime minister is thinking, the mood is certainly forming that the tax increase is unavoidable,"said a person close to a senior ruling party official.

Mr Abe did not specify the size of the stimulus but said it would need to be enough to counter the economic drag of the tax increase, Mr Amari said. That means the package must be 2 trillion yen or more, Mr Amari has said previously.

The premier is trying to balance his top priority of ending 15 years of deflation and tepid growth against the need to get a grip on Japan's public finances. At more than double annual GDP, Japan's public debt is the biggest in the industrial world.

The bond market has long given Tokyo the benefit of the doubt, but policymakers fear that any concerns over Japan's commitment to fiscal reform would crush bond prices and send interest rates spiking.