Japan lawmakers discuss big stimulus to offset 2017 tax hike

[TOKYO] Japan's debate over whether to go ahead with a 2017 sales-tax increase is shifting in the wake of stabilization in global financial markets and signs of resilience in its economy.

While a soaring yen, falling stocks and indications of yet another Japanese recession spurred recommendations earlier this year to put off the April 2017 tax hike, those dynamics have now changed.

Some ruling-party lawmakers are instead proposing to let the scheduled boost in the consumption levy to 10 per cent from 8 per cent proceed, and to address any hit to the economy through an enlarged fiscal package.

One senior Liberal Democratic Party legislator who has advised Prime Minister Shinzo Abe plans to submit a proposal Friday for as much as an extra 30 trillion yen (S$376 billion) in supplementary fiscal measures over the 2016 and 2017 fiscal years.

The presentation from Kozo Yamamoto and his group of LDP supporters is designed to enable the tax rise go ahead, and address damage from this year's earthquake in southern Japan.

"It is obvious that simply announcing a delay will not improve the economy," Mr Yamamoto said in a copy of the proposal obtained by Bloomberg. "We need to remove uncertainty as far as possible and introduce policies that bolster weak demand," he added.

Though Mr Abe had repeatedly said only a Lehman bankruptcy-like shock would trigger a halt to the 2017 tax rise, he had also convened economic advisory panels where calls for a delay were aired.

The narrative among a number of Abe advisers and Japan economists had for months been that the prime minister would use his leadership of the Group of Seven this year to help shape a decision to put off the sales-tax boost.

G-7 expressions of concern about sluggish global growth, along with a deepening worry about excessive use of monetary policy, could have offered a rationale for Japan to make a fiscal contribution through avoiding the tax increase.

Japan's Finance Ministry has long lobbied for higher consumption taxes to help rein in the nation's government debt load - the world's largest.

Japan's initial estimate of gross domestic product for the first quarter showed a better-than-forecast performance, potentially influencing the country's fiscal discussions.

The 1.7 per cent annualized gain from the previous three months even exceeded the 0.5 per cent expansion in the US, which is contemplating tightening monetary policy.

The call from Mr Yamamoto and his allies comes just as Japan's G-7 leadership kicks into high gear, with finance ministers and central bank governors from the group of advanced economies gathering Friday near Sendai in the north of the country. Those sessions end Saturday. Mr Abe hosts the G-7 summit May 26-27.

"The entire tax hike could be effectively be nullified by increased expenditure," Daiju Aoki, an economist at UBS Group AG in Tokyo, wrote in a note this week.

"If the consumption tax hike goes ahead as planned, a preemptive demand rush will start to emerge in the second half of the financial year, so the purpose of any supplementary budget would be to support a dip in the economy from April 2017."

Another implication: the Bank of Japan may take action to help cushion the impact of the tax increase, Mr Aoki said. When Japan boosted the levy to 8 per cent from 5 per cent in 2014, it tipped the economy into a recession. That was an echo of what happened on the previous occasion, in 1997.

Mr Aoki, writing before the Friday news on Mr Yamamoto's proposal, still considered the chance of a postponement "high." The recommendation to go ahead with the tax rise from Mr Yamamoto, who helped to convince Mr Abe while in the political opposition to embrace a reflation manifesto, marks a change in his stance.

As recently as April, he even suggested an argument could be made for cutting the sales tax, given weakness in consumption.

His proposals are: To increase the sales tax as planned to 10 per cent in April 2017 and not to raise it further for some time; extra spending of 10 trillion yen for economic stimulus and 5-10 trillion yen for revival of the quake-hit Kumamoto prefecture in fiscal 2016, which ends in March; extra spending of 10 trillion yen in fiscal 2017 and 7 trillion yen in fiscal 2018; about 4 trillion yen of those funds to be spent on sales-tax rebates and the remainder on public investment; funds to be raised via bond issuance, taking advantage of negative interest rates.

BLOOMBERG