Prime Minister Shinzo Abe on Tuesday effectively started preparations for a planned sales tax hike, instructing his ministers to draw up a stimulus package by the end of this month to offset the possible negative economic impact of the measure.
The instruction came with expectations growing that Abe will decide to raise Japan's consumption tax rate to 8 percent next April from 5 percent as legislated following the release of a series of benign economic data.
Abe is likely to announce his final decision early next month, possibly on Oct. 1, amid lingering concern that a rise in the sales tax could undermine the country's nascent economic recovery and derail efforts to beat nearly two decades of deflation.
Earlier Tuesday, Abe met with some Cabinet members including Finance Minister Taro Aso and economic and fiscal policy minister Akira Amari to discuss the issue.
"The prime minister called on us to map out by the end of this month a package" to ensure economic growth and distribute its fruits all over the country, Aso told a press conference after meeting with Abe.
"If the government raises the sales tax rate, we have to prevent consumer spending and the economy from languishing. (Abe) asked us to come up with several ideas," Aso added.
Aso said the government is expected to start compiling early next year a supplementary budget for the current fiscal year through March 2014, though he emphasized that Abe has yet to decide on whether to carry out the tax hike.
Aso quoted Abe as saying, "I'll make a judgment while carefully considering whether we can achieve our top priority of ending deflation and a good balance between economic revitalization and fiscal consolidation (after the tax hike)."
The package would see the government craft an extra budget worth more than 2 trillion yen ($20 billion) for fiscal 2013 that could finance cash payments to lower-income households and home buyers, sources close to the matter said. It would also involve tax measures to encourage companies to invest and raise salaries.
Under legislation enacted last year, the government will eventually increase the sales tax rate to 10 percent in October 2015 to secure funds for swelling welfare costs in the country where the population is graying.
But the planned sales tax increase has fueled fears that the economy could suffer from slower business investment and weaker private consumption.
Abe has said he will make a final decision on the tax increase after looking at the results of the latest Tankan business sentiment survey by the Bank of Japan due out Oct. 1.
The prime minister had earlier said he wanted to look at revised gross domestic product figures for the April-June period.
The GDP data, released Monday, showed the economy grew an upwardly revised 3.8 percent in annualized real terms, strengthening the view within the government and ruling parties that the tax hike would be implemented as planned.
During the government's recent hearings on the tax hike plan, a majority of the 60 experts who attended were supportive, with some backing it on condition it would be accompanied by measures to streamline the country's welfare services.
But some of the experts opposed the current plan, suggesting it be revised, such as by making the margin of the tax increase smaller to ease the possible negative impact on the economy.
Also Tuesday, some officials said the government will upgrade its basic assessment of the economy for this month, the first such move in two months and another development that could affect Abe's decision on the sales tax hike.
In August, the Cabinet Office noted the economy is "picking up steadily and shows some movements on the way to recovery" while "recent price developments indicate that the deflation is ending."
The latest report to be released Friday will reflect recent upturns in employment and business investment in line with robust industrial output, the officials said.
In a similar move, the BOJ upwardly revised its assessment last week, saying the economy "is recovering moderately." The central bank used the term "recovering" in its monthly report for the first time in five years.