* Japan PM Abe to announce sales-tax hike, stimulus package
* Hike is biggest fiscal-reform move since 1997
* Stimulus to offset some 5 trln yen of 8 trln yen hike
* Japan under pressure from credit rating agencies
By Shinji Kitamura and Takaya Yamaguchi
TOKYO, Oct 1 Japan's Prime Minister Shinzo Abe
will take a step on Tuesday that none of his predecessors has
tried in more than 15 years - making a dent in the government's
Abe, riding a wave of popularity with economic policies that
have begun to stir the world's third-biggest economy out of
years of lethargy, will announce that the government will raise
the national sales tax to 8 percent in April from 5 percent, a
final draft of the government economic plan, seen by Reuters,
But at the same time he will soften the blow to the nascent
recovery. As the tax increase is set to raise an additional 8
trillion yen ($81.42 billion) a year, Abe will also announce an
economic stimulus package that, according to the draft, is worth
5 trillion yen.
A source involved in the process said the size of the
package could increase somewhat, depending on how some corporate
tax issues are dealt with.
The tax increase marks the first serious effort since 1997
to rein in Japan's public debt, which recently blew past 1,000
trillion yen ($10.18 trillion). At more than twice the size of
the economy, this is the heaviest debt load in the industrial
The government has done little to rein in spending and is
watering down the impact of the tax hike, so some critics doubt
Tuesday's move will be enough to get Japan on track to achieve
its goal of halving the budget deficit - excluding debt service
and income from debt sales - by the fiscal year to March 2016
and balance it five years later.
"Even if Abe's policies go well, we still will not eliminate
the primary budget deficit," said senior Standard & Poor's
official Takahira Ogawa.
"It will just slow the pace of growth in outstanding debt
and slow the pace of budget-deficit growth, but things would
still be deteriorating," Ogawa, the ratings firm's Tokyo-based
director of sovereign ratings, told reporters last week.
S&P could cut Japan's rating if it does not shrink its
budget deficit, he said.
Still, pressing ahead with the tax hike bolsters the image
Abe has sought to foster of a decisive leader, withstanding
opposition from his advisers and some of his own party.
"This plan was already in the works, but we have to give Abe
some credit for following through with it," said Hiroaki Muto,
senior economist at Sumitomo Mitsui Asset Management Co.
Abe is seeking a difficult balance with massive fiscal and
monetary stimulus to end 15 years of deflation and tepid growth,
while setting the groundwork to get the government's finances in
order over time.
Financial markets have given Tokyo the benefit of the doubt:
the government can borrow 10-year money for less than 0.7
percent. But government officials and private economists have
long feared a crisis in confidence in Japan's creditworthiness
that could cause a crippling spike in interest rates.
The tax hike is part of a package agreed last year by the
previous government and the two current ruling parties, as the
first step in a doubling of the consumption tax - similar to a
goods-and-services tax in other countries - over two years. The
law stipulates that the government must confirm that the economy
is strong enough to weather the tax hike before proceeding.
Japan posted the strongest growth among the Group of Seven
powers in the first half, expanding at an annualised 3.8 percent
rate in the second quarter after a 4.1 percent surge in the
first. Abe chose Tuesday for the announcement as it should give
him the final economic justification he needs: the release of
the "tankan" survey from the Bank of Japan.
The closely watched quarterly survey is expected to show
that positive sentiment outweighed gloom among Japan's big
manufacturers for the first time since September 2011, according
to a Reuters poll of economists.
But the tax increase remains an economic and political risk.
Japan spiralled into deep recession after the sales tax was
increased in 1997 to 5 percent from 3 percent. Economists are
divided on how much the hike was to blame, as the Asian
financial crisis and then Japan's own banking crisis followed
Regardless of the economic impact, the tax increase became
an enduring trauma for Japanese leaders after it helped end the
political career of then-premier Ryutaro Hashimoto. Even the
popular Junichiro Koizumi was unable to make significant headway
on fiscal reform during his 2001-2006 term.
To ensure that the fiscal tightening does not derail the
recovery, Abe ordered his government to compile the stimulus
package to be announced on Tuesday.
It features public-works spending for the 2020 Tokyo
Olympics, tax breaks to promote corporate capital spending and
an early end to a corporate tax add-on that has funded
reconstruction from the 2011 earthquake and tsunami, which will
save companies 900 billion yen.
The stimulus could add 0.5-0.6 percentage point to economic
growth in the fiscal year starting in April, but after that the
impact is likely to fade away, said Sumitomo Mitsui's Muto.
The package offers some goodies to individuals, such as aid
to home buyers, but with the tax breaks mostly targeting
companies and the tax hike directly hitting consumers, Tuesday's
steps bolster the view of critics that "Abenomics" favours
corporate Japan at the expense of the little guy.
The stimulus offsets some two-thirds of the money being
sucked out of the economy via the tax hike. This means the
combined measures effectively resemble proposals from some of
the premier's reflationist advisers: to raise the tax by just 1
percentage point instead of 3 to protect the recovery.
Still, any improvement in government revenue from the tax
increase is likely to be quickly overwhelmed by expenditures in
a country where a rapidly ageing society and generous public
services are blowing an ever-bigger hole in the budget.