Japan panel backs sales tax hike coupled with stimulus

TOKYO (Reuters) - Japan's government won backing for a controversial decision to raise the national sales tax in 2014 after influential members of a special advisory panel said the step would not threaten economic recovery or business confidence if it was coupled with other stimulus.

"Japan's economy is steady at the moment and we should raise the tax as planned," Mr Hiroshi Yoshikawa, a University of Tokyo economist, told reporters on Saturday as he left the last session of a week-long, government hearing that also featured business leaders and consumer advocates.

Prime Minister Shinzo Abe convened the panel to hear a wide range of views on whether to press ahead with a planned hike in the consumption tax to 8 per cent from the current 5 per cent in April. Unless Mr Abe changes the plan, the sales tax will be raised to 10 per cent in October 2015.

Advocates, including officials at the Ministry of Finance, say raising the tax would be an important first step in trying to lower public debt, which is the worst among industrialised countries, at more than twice the size of Japan's economy.

Mr Abe is expected to make a decision in the next several weeks.

"Most people on the panel said we should raise the sales tax and that the risks of not doing so outweighed the risks associated with proceeding as scheduled," said Economics Minister Akira Amari.

Mr Abe has made ending 15 years of deflation and revitalizing the economy among his top priorities, so some of his advisers and even some members of his ruling Liberal Democratic Party worry the sales tax hike will slow consumption.

Japan's economy emerged from recession in 2012 and data for much of this year has shown the benefits of monetary easing from the central bank and the government's drive to accelerate growth.

The jobless rate is at the lowest in almost five years, there are tentative signs wages will start rising and consumer spending has been strong. Exports grew at the fastest pace in nearly three years in July, while core consumer prices rose at the fastest pace in nearly five years.

Many on the 60-member tax advisory panel, which included labour union heads and executives from companies ranging from a small spring maker to Toyota Motor Corp, said they could accept tax hikes if the government took some steps to offset the expected dip in consumer spending.

Mr Akio Toyoda, president of Toyota, urged the government to cut the tax on vehicles when the consumption tax is hiked to 8 per cent as an offset. Others urged public works investment or a tax incentive for companies to invest in new plant and equipment.

When Japan last hiked the sales tax from 3 per cent to 5 per cent in 1997, consumer spending tumbled by 13 per cent in the quarter after the higher tax went into effect. That was followed by a recession.

Mr Yoshikawa, an expert on Japan's "lost decade" of economic decline, said he had told officials that the 1997 recession was more directly caused by a concurrent 7 per cent drop in public works than the consumption tax hike.

"The economy is a living thing. If business conditions turned especially bad, some policy response would be necessary,"said Mr Yoshikawa.

Mr Masaaki Kanno, chief economist at JPMorgan in Tokyo, said he had urged the government to spend 3 trillion yen (S$39.1 billion) to offset the impact of the sales tax hike, saying stimulus of that size would not harm public finances.

"I stressed that we should raise the sales tax as scheduled and consider raising it even further because it is important for fiscal discipline," Mr Kanno said.

At 5 per cent, Japan and Canada have the lowest equivalent consumption tax in the Organisation for Economic Cooperation and Development.

Since Japan's debt burden is so large, economists, ratings agencies and the International Monetary Fund have long argued Japan has ample room to raise its sales tax and increase government revenue.

Government officials have said revised April-June gross domestic product data, due on Sept 9, would be one factor Mr Abe would consider in reaching a decision.

Preliminary data issued this month showed the world's third-largest economy expanded for a third straight quarter in April-June but at a slower pace than expected.

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