--Recasts With Official Announcement
TOKYO (MNI) - Japanese Prime Minister Shinzo Abe on Tuesday announced that his pro-business government will raise the 5% sales tax to 8% next April as planned and decide within three months to end a year earlier, on March 31, a levy on firms to finance reconstruction of the region devastated by an earthquake and tsunami in 2011.
He told an evening news conference that Japan can seek both sustained economic growth and fiscal consolidation at the same time. Higher revenue from the consumption tax increase, the first in 17 years since it was raised from 3% in April 1997, will be used to finance growing social security costs, he said.
The government will put together another economic stimulus package, this time totaling Y5 trillion, to not only cushion the impact of the tax hike temporarily but also revitalize the economy which has until recently been mired in constant price drops for 15 years.
"This is an investment in the future," Abe said of the package which is aimed at encouraging companies to invest and share higher profits with employees by raising wages and creating more jobs.
"Trying to achieve economic growth without fiscal consolidation is not sustainable, but there is also a high risk of pushing for fiscal consolidation and hurting growth, which is not sustainable, either," he said.
"For this purpose, today's package is the best possible scenario."
Abe believes in the trickle-down effect and he used the theory to defend his decision to end the temporary business levy for rebuilding Japan's northeastern region that is still reeling from the March 2011 disaster and continued radiation leaks from Fukushima.
"I don't buy the concept of corporations against individuals. Many people work at companies to make a living. If revenues rise at corporations, they can share it by raising wages," he said.
"During the deflationary period, companies didn't give back profits and hoarded cash as internal reserves. We will change it and make it a loss for firms not to share with employees."
Asked if the government will also raise the sales tax further to 10% in October 2015 as stipulated in the law passed last year, Abe simply said he will "make the right decision."
On ways to cushion the impact of the higher tax burden, the ruling coalition agreed on Monday to give Y1 trillion back to the public in tax breaks and consider an early end to the corporate tax surcharge for reconstruction, which would bring the total reduction to around Y2 trillion.
Abe didn't provide details of the stimulus package but press reports said the proposed tax breaks include a new credit for investments in cutting-edge equipment, expansion of an existing research and development credit, and a lower threshold for a credit for firms that raise wages.
The Mainichi Shimbun newspaper said the tax break for companies investing in state-of-the-art factories and offices will total Y740 billion (including implementation in the current fiscal year), those encouraging pay hikes will amount to Y160 billion and tax returns for home buyers with mortgage payments will come to Y110 billion.
Government officials are counting on higher tax revenue to pay for the planned stimulus package, instead of issuing new bonds, the Mainichi said.
Before seeing the results of the Bank of Japan's Tankan business survey for sentiment and investment plans, Abe had already decided to raise the consumption tax as part of fiscal consolidation efforts, assuming that enhanced fiscal programs can help smooth out a temporary slump in demand after the tax increase.
Abe has said he will make a final decision on the tax hike after examining the Tankan.
Other indicators have shown that the Japanese economy is recovering and moving out of years of deflation, thanks to strong consumer spending, increased public works projects and a gradual pickup in overseas demand. But base wages remain depressed, posing a threat to consumption as the weak yen is pushing up electricity bills and food prices.
Before announcing his final tax hike decision, Abe took some procedures to demonstrate that he's taking various views into account.
In late August, the government invited 60 people - in groups ranging from business, labor and municipal leaders to economists and university professors - to hear the pros and cons about the tax hike at a crucial time when Japan is trying to overcome 15 years of deflation with aggressive monetary easing, increased fiscal spending and pro-growth deregulation.
Of the 60 participants, 43 said the consumption tax should be raised to 8% next year as planned while the rest either called for a more gradual hike or were against the increase all together.
On Tuesday, Abe heard the consensus view of the 11-member Council on Economic and Fiscal Policy that he chairs. The members comprise six cabinet ministers including the prime minister, Bank of Japan Governor Haruhiko Kuroda, two economists and two business executives.
The panel concluded that the risk of raising the sales tax as planned and possibly hurting demand will be smaller than the risk of foot-dragging on the tax increase and thus failing to secure funds for growing social security costs and possibly undermining investor confidence in Japan's debt.
"Comparing the two, the risk of raising the consumption tax rate as scheduled is estimated to be smaller if measures are taken to first cope with downside risk to growth and then raise the growth potential of the economy and take it to a path toward strong growth led by private-sector demand through sufficient budgetary and tax measures as well as deregulation and reforms," the council said in a statement.
The BOJ's Tankan survey released on Tuesday showed that sentiment among major manufacturers came in stronger than expected, posting the third consecutive quarterly rise in September led by makers of production machinery (the key to a capex recovery), electric machinery, ceramics/stone/clay and oil refineries.
The sentiment index for major manufacturers rose to +12 in September from +4 in June, hitting the highest level in about six years since +19 in December 2007.
Exporter profits have been supported by the relatively weak yen and a gradual pickup in demand from some regions.
Large non-manufacturers (construction, leasing and information services, etc.) are backed by solid consumer spending and increased fiscal spending. Sentiment among hotels and restaurants dipped in September after improving on some wealth effects earlier this year, but they see brighter prospects for December.
Looking three months ahead, major firms overall expect their sentiment to be flat to slightly down while smaller manufacturers see better conditions and smaller non-manufacturers foresee a slight decline.
Capital investment plans by all firms for fiscal 2013 are projected to rise 3.3%, up from +2.0% forecast in the June survey, but it is still uncertain whether they will be implemented as planned.
FISCAL POLICY TRICK
What Abe unveiled on Tuesday is a fiscal policy trick.
On the drawing board is yet another fiscal stimulus package, this time to cushion the impact of the tax increase on households and businesses, following on from the earlier Y10 trillion economy-boosting measures designed to overcome deflation.
The dampening effects of the tax hike will be partly offset by stimulus measures worth about Y5 trillion -- equivalent to about two-thirds of the anticipated revenue from the three percentage-point tax increase.
While Deputy Prime Minister and Finance Minister Taro Aso has been pushing for the hike as planned, top economic aides to Abe, including Yale University professor Koichi Hamada, have called on the premier to delay by a year the two-step sales tax increase to 8% next April and to 10% in October 2015 - or to raise the tax rate by one percentage point every year.
By raising the consumption tax rate by three percentage points, Abe can claim that the government is serious about fiscal consolidation. At the same time, in giving two percentage points in tax revenue back to the public, he is accepting some views that the increase should be a gradual one.
Abe has unveiled the blueprint of his pro-growth strategy in stages since he took office last December, vowing to revive Japan's moribund economy.
Despite his tough talk, however, the prime minister has been careful about proposing fully opening up the electricity supply, farming and medical services markets to newcomers for fear of upsetting vested interests.
In a mini-reform version of deregulation, he is considering creating special economic zones. Abe has also shied away from meeting demands from business lobbies to slash corporate tax rates and revise the law to make layoffs easier.
Business leaders have been calling for a cut in the 38% effective corporate tax rate to 25% to improve the competitiveness of Japanese firms.
But the Ministry of Finance is opposed to a large-scale permanent tax cut before embarking on credible debt reduction plans. It is concerned about the risk of triggering a spike in borrowing costs should investors get the impression that Japan is not serious about fiscal consolidation.
Japan's ordinary effective corporate tax rate is about 35% but for the three years through March 31, 2015, it is temporarily set higher at 38% due to a special levy for rebuilding the northeastern regions hit by the 2011 earthquake.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: msato@mni-news.com