Japan to increase sales tax next April

TOKYO: Japan will raise its sales tax to eight per cent next April as planned, a move seen as crucial to keep the country'ssocial security system running and prune its ballooning national debt.

Prime Minister Shinzo Abe, who personally gave Japanese voters the bad news yesterday, will also bring in a five trillion yen (US$10 billion) stimulus package to soften the blow and to "invest in the future". "I am confident that this is the best scenario," he told a press conference.

The announcement by Abe came just hours after the Bank of Japan released its closely watched "tankan" quarterly survey results. They showed an improvement in business sentiment among major manufacturers for three straight quarters and the most optimistic level since December 2007.

The tankan is the final key economic indicator that Abe said he would review to determine if the economy – finally showing signs of recovery after 15 years of deflation – is resilient enough to take on a three-point hike in the sales tax.

His decision was also made easier by Japan's economic growth rate, which had earlier been revised upwards to an annualised 3.8 per cent for the April to June quarter.

But with an additional burden of some eight trillion yen on household expenses from the sales tax hike, and a sharp drop inconsumer demand expected immediately after the tax increase kicks in, Abe felt obliged to assemble a stimulus package.

A household with an average annual income of four million yen may need to fork out an extra 65,000 yen with the new tax. Abe promised to give low-income earners, including pensioners, 10,000 yen each to offset the higher tax.

Details of the stimulus package will not be drawn up until December, but it is expected to include tax incentives for employers if they raise their payroll by at least five per cent more than the previous year.

While many employers are willing to boost bonuses, raising basic monthly wages is another matter as such increases are difficult to withdraw when the economy sours.

"Employers want Abe to show them more growth strategies that will convince them that the economy will get better," said Yoshikiyo Shimamine, chief economist at Dai-Ichi Life Research Institute. "Top of the list is deregulation, and relaxing labour laws to make it easier to fire employees in bad times."

But more than nine months into his administration, Abe has yet to set economic reforms in motion.

In an editorial yesterday, the influential Nikkei business dailywarned: "Deregulation necessarily involves confronting special-interest groups and the ministries and policymakers with ties to them."

The centrepiece of Abe's package yesterday was to have been the lifting of a 10 per cent reconstruction surcharge on corporate taxes, which he hoped would encourage employers to raise wages and thus boost consumer demand.

Disagreeing strongly with the prime minister, however, coalition leaders instead decided to postpone till December a decision whether to remove the surcharge – used to fund reconstruction projects in areas hit by the 2011 quake and tsunami – a year early.

Besides sending the wrong signal to people hit by the disaster, coalition leaders argued that a tax cut for companies will not go down well with voters, who themselves will have to pay a 2.1 per cent surcharge on income tax for the next 25 years.

Analysts say the move to hike the sales tax was undoubtedly Abe's most difficult political decision to date since taking office last December.