Abe bets he can break Japan sales tax jinx with April 1 rise

TOKYO, March 31 Mon Mar 31, 2014 1:44am EDT

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TOKYO, March 31(Reuters) - Shinzo Abe has already ensured himself a place in Japan's history books with his comeback as prime minister five years after a brief, troubled first term. Now he aims to break another jinx by implementing a sales tax increase, a move that has been the downfall of previous leaders.

Japan's sales tax will rise on Tuesday to 8 percent from 5 percent, the first increase in 17 years and the first step in a two-stage boost that is set to take the levy to 10 percent in 2015 as part an effort to curb the nation's massive public debt.

Abe hopes to break the spell that has been the kiss of political death for past premiers, such as Ryutaro Hashimoto who raised sales tax to 5 percent from 3 percent in 1997 and Yoshihiko Noda who brokered a deal in 2012 to enact the current rise, only to see his Democratic Party fracture and fall from power.

Economists say Abe, 59, has a good chance of surviving the rise in the tax, seen as vital if Japan is to start getting a grip on its public debt and fund the bulging social security costs of the world's fastest-ageing population.

That's because the economy is in better shape now after 15 months of his "Abenomics" recipe of hyper-easy monetary policy, fiscal spending and promised reforms. Hashimoto quit in 1998 as the weak economy, battered by the sales tax rise and the Asian financial crisis, led to his Liberal Democratic Party's (LDP) humiliating loss in a national election.

"2014 is not 1997," said Jesper Koll, head of equities research at JP Morgan in Tokyo. "The probability of success is better than ever," he added, citing a tight labour market, increased household and small-business borrowing and a 5.5 trillion yen ($53.44 billion)extra budget enacted in December to help cushion the impact of the tax rise.

PHASE TWO?

Japan is ready to unleash more fiscal and monetary stimulus as needed if the sales tax proves more damaging to growth than expected.

"We would take necessary steps," Deputy Chief Cabinet Secretary Katsunobu Kato told Reuters recently. "Each policy step would work its effects on the economy with a lag, so we'd need to mix them as appropriate depending on the situation at the time."

The Bank of Japan has kept monetary policy unchanged since its intense burst of stimulus a year ago, when it launched an aggressive asset buying programme to push consumer inflation to 2 percent in two years, a tough target for an economy plagued by deflation for the past 15 years.

Japan's economy posted the strongest growth among industrial powers in the first half of 2013, spurred by Abe's reflationary policies, but has slowed to less than a 1 percent annual rate since then. Policymakers and private-sector analysts expect the economy to dip in the April-June quarter before rebounding in July-September.

"The combination of a major tax hike and modestly contractionary spending policy will both lower growth and leave the economy vulnerable to negative shocks," Morgan Stanley MUFG Research Japan said in a report, noting that this year's extra budget was smaller than last year's.

"Unlike in 1997 when the consumption tax was lifted from 3 percent to 5 percent, however, the risk of the Japanese economy sliding back into full-blown recession is limited."

Abe, who took office in December 2012 promising to revive Japan's economy and bolster its military, must decide by year end whether to take the next step dictated by legislation passed in 2012 under predecessor Noda to raise the sales tax to 10 percent from October 2015.

Even that level is widely seen by experts as insufficient to rein in public debt that is already worth more than twice the value of Japan's economy.

Whether Abe sticks to the plan, however, depends on a confluence of factors including not only the economy but his public approval. His ratings remain above 50 percent - high for a Japanese leader after more than a year in office - but many voters dislike specific policies on his agenda, including a drive to restart nuclear reactors shut down after the March 2011

Fukushima nuclear disaster and a campaign to loosen the limits of Japan's pacifist constitution.

Some 70 percent of voters surveyed by the Mainichi newspaper oppose raising the tax to 10 percent, compared to 26 percent who approve, according to a poll published on Monday.

"I would guess that the sales tax rise would remain on schedule, but it could easily go in the other direction," said Martin Schulz, senior economist at Fujitsu Research Institute. ($1 = 102.9250 Japanese Yen) (Additional reporting by Tetsushi Kajimoto; Editing by William Mallard and Raju Gopalakrishnan)

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