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Greater stimulus urged as panel kicks off debate on sales tax hike

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(GlobalPost/GlobalPost)

The government on Monday commenced its final efforts to analyze the possible negative economic impact of the planned sales tax hike next April, seeking opinions from dozens of experts, some of whom have suggested the need for further stimulus steps.

A government panel led by economic ministers started a six-day hearing amid lingering concern that the consumption tax increase to secure funds for swelling social security costs could thwart Prime Minister Shinzo Abe's efforts to overcome nearly two decades of deflation.

The panel will hear from 60 people from a variety of backgrounds, including heads of nonprofit groups, scholars and business leaders, to provide Abe with information to decide as early as next month whether to proceed with the tax hike to 8 percent from the current 5 percent.

"I will make a decision this fall once the panel reports and after looking at various economic indicators," Abe told reporters while visiting Kuwait.

Abe has said he will examine Japan's economic growth data for the April-June period, among other factors. Revised figures for second-quarter gross domestic product are due out on Sept. 9.

On Monday, the panel heard from seven people, including Kazumasa Iwata, a former deputy governor of the Bank of Japan, who proposed cutting corporate and individual income taxes to ease the potential pressure on domestic demand from the sales tax hike.

Iwata, who currently heads the Japan Center for Economic Research, presented an estimate showing the tax increase could reduce business investment, household spending and other domestic demand by a total of 15 trillion to 16 trillion yen over the two years through March 2016.

He also said that in order to ensure an early exit from deflation, the government must consider limiting increases in the sales tax rate to as little as 1 percentage point per year.

Under legislation enacted last August, the government plans to raise the tax in two steps -- to 8 percent next April and 10 percent in October 2015 -- to cover snowballing welfare costs at a time when the proportion of elderly people is increasing.

With a smaller increase, state coffers would grow more slowly than under the current plan. Iwata said that would force the government to continue raising the tax rate beyond fiscal 2018.

The panel is slated to hold meetings seven times at the prime minister's office through Saturday, with seven to nine experts scheduled to meet at one time for around two hours.

Among other participants on the first day, Hiromasa Yonekura, chief of the Japan Business Federation, the country's biggest business lobby, told reporters that he had asked the government to continue as planned, while Kaori Yamane, head of the Japan Housewives' Association, opposed the plan.

Yamane said that a tax hike without wage increases would only widen income disparities. "As a representative of consumers, I decisively oppose" the sales tax hike, she told reporters.

Out of the seven participants in the first session, five supported the government's plan for the hike to 8 percent in April, regarding it as crucial for fiscal rehabilitation and sound welfare services, economic and fiscal policy minister Akira Amari told a press conference after the meeting.

The country's fiscal health has been internationally scrutinized as it is the worst among major developed economies at more than 200 percent of GDP.

The government "should avoid putting off" the planned sales tax hike in April, said Amari, who is set to attend all the meetings of the panel along with Finance Minister Taro Aso and BOJ Governor Haruhiko Kuroda.

The panel's discussions will be closely watched by financial markets as some of Abe's aides have recently urged the prime minister to delay the tax increase, arguing it could drag down business and household spending, and choke economic growth.

Experts attending the hearing include tax hike opponents, in particular Koichi Hamada, a professor emeritus of economics at Yale University and a special adviser to Abe, as well as University of Shizuoka professor Etsuro Honda, another special adviser to Abe.

Hamada and Honda, who want the tax hike postponed or the rate of increase reviewed, are slated to attend meetings on Tuesday and Saturday, respectively.

==Kyodo

http://www.globalpost.com/dispatch/news/kyodo-news-international/130826/greater-stimulus-urged-panel-kicks-debate-sales-tax--0