World Economy

Japan Needs $20b to Avoid Tax Hike

Japan Needs $20b to Avoid Tax HikeJapan Needs $20b to Avoid Tax Hike

It could be difficult for the Bank of Japan to taper its record monetary stimulus before a planned sales-tax hike in 2017 and the government may need to compile a ¥2.5 trillion ($20 billion) economic package to cushion the blow to households, an adviser to the prime minister said.

Etsuro Honda, who has known Prime Minister Shinzo Abe for three decades and advises him on economic matters, said the government would need to “take a cautious approach” after an increase in the levy last year sparked a recession, Bloomberg reported.

“Fiscal spending of about 2.5 trillion yen will probably be needed to counter the impact,” Honda said in an interview at the prime minister’s office in Tokyo on Tuesday.

Abe’s government is walking a fine line as it tries to rein in a debt burden that’s more than twice the size of the nation’s annual economic output. At the same time, Abe’s hand-picked central bank chief, Haruhiko Kuroda, is pumping money into the economy to rekindle inflation that Japan needs for growth.

Tapering before April 2017 “is a bit hard to imagine,” said Honda. “The BOJ will have to judge whether it can taper by looking at the degree of deceleration after the tax hike. When the economy is slowing, it can’t start tapering.”

An increase in the tax from 5% to 8% in April last year sparked two quarters of economic contraction, even after Abe unveiled a ¥5.5 trillion stimulus package in December 2013. The next planned move would take the levy to 10%.

Honda was instrumental in persuading Abe last year to postpone the next hike by 18 months to April 2017.