Japan sales tax hike won’t hit economy: Bank of Japan governor

TOKYO - Agence France-Presse

Bank of Japan governor Haruhiko Kuroda has said a government tax-hike plan would not damage the economy, but if it does he “won’t hesitate” to adjust monetary easing.

Prime Minister Shinzo Abe’s government wants to increase incrementally a tax on sales over the next two years, however some economists fear the move could risk derailing Japan’s road to economic recovery.

The plan proposes a three-percent rise to eight percent next year, before a further increase to 10 percent in 2015.

“The government has said it will proceed with its fiscal structural reforms. I urge the government to firmly implement the plans,” Kuroda told the Mainichi Shimbun in an interview published yesterday.

He said Japan’s economy “isn’t likely to slow because of the sales tax hike” but added that if it did: “Monetary policy would be adjusted. I won’t hesitate.” In April the BoJ unveiled a multi-billion-dollar bond-buying scheme -- similar to the US Federal Reserve’s -- aimed at kickstarting growth in the limp economy and bringing an end to growth-sapping deflation.

The BoJ’s easing under Kuroda is a key part of Prime Minister Shinzo Abe’s economic policy dubbed “Abenomics” and has been credited with weakening the yen and boosting exports.

But economists are divided over the merits of the policy, which doesn’t tackle Japan’s massive public debt -- a problem the sales tax increase is intended to address.

Japan is grappling with a debt that stands at more than double gross domestic product, the highest ratio in the industrialized world, and it is poised to grow as a rapidly ageing population turns to public pensions.

Most of the nation’s debt is held domestically, allowing Tokyo to escape much of the criticism that has befallen eurozone countries, including Greece.

The International Monetary Fund said earlier this month it “welcomed” Tokyo’s plan to double the country’s sales tax by 2015.

With the current monetary easing policy of a two percent inflation target in two years, “there is no need of additional easing if the economy moves in accordance with our main scenario,” he said.

“But the economy is a creature, and there are various risks inside and outside Japan” such as European sovereign debt crises and the state of the US economy, Kuroda said.