* Japan PM Abe announces 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 Tetsushi Kajimoto and Stanley White
TOKYO, Oct 1 Japan's Prime Minister Shinzo Abe
took a step on Tuesday that none of his predecessors had managed
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, said the government will raise the national
sales tax to 8 percent in April from 5 percent.
But at the same time he softened 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 also announced an
economic stimulus package worth 5 trillion yen.
"It is my government's responsibility to have Japan's
economy regain hope, vigour and confidence for growth, while at
the same time maintaining trust in the country, as well as
securely passing on the social security system to the next
generation," Abe told a nationally televised news conference.
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
world. The country also runs a huge annual budget deficit of 10
percent of GDP.
Yet, successive governments have done little to rein in
spending. As Abe is watering down the impact of the tax hike and
has yet to address an explosion of social-welfare spending,
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.
ABE'S BALANCING ACT
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.
He sought to portray his decision within the long historical
arc of his country's development, harkening back 250 years to
fiscal reforms by the Choshu Clan in his own home region in
western Japan, which he said laid the groundwork for
agricultural expansion and development of new industries, such
as salt and paper.
"The package we have compiled is not a transient step that
just boosts the economy in the short term," Abe said. "It is an
investment for the future that mitigates the burden we are
asking you to shoulder, in order to strengthen and stabilise
social security while driving investment, boosting wages and
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.
Seven economists canvassed by Reuters forecast the tax hike
will shave 0.8 to 1.2 percentage point off growth in the fiscal
year from next April, while the stimulus package will restore
0.4 to 0.8 point.
Although the public is split on the sales-tax hike,
according to a survey this week, many business leaders expressed
understanding for Abe's two-pronged approach.
"In the long term, for us to be able to do business with the
rest of the world, it's vital for the world to have a sense of
security and confidence in Japan," Fujitsu Ltd President Masami
Yamamoto told reporters. "The short-term concern is whether the
economy suffers a relapse just as it's in a rising trend."
The tax hike is part of a package agreed last year by the
previous government and the two current ruling parties. It is
the first step in a doubling of the consumption tax - similar to
a goods-and-services tax in other countries - over two years.
By law Abe had to confirm that the economy was strong enough
to weather the tax hike before proceeding.
Japan posted the strongest growth among the Group of Seven
powers in the first half. On Tuesday, the quarterly "tankan"
survey of corporate sentiment from the Bank of Japan gave Abe
the final economic justification to push ahead with the tax
The closely watched survey found optimism surging among
Japan's big manufacturers, with the key sentiment index jumping
to 12 from 4 in June, the highest since December 2007 and well
above the forecast of 7.
Still, the tax increase is 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 Japan's political leaders after it helped
end the 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.
Cushioning the tax-hike pain, Tuesday's package features
public-works spending for the 2020 Tokyo Olympics and tax breaks
to promote corporate capital spending. Officials will also
consider an early end to a corporate tax add-on that has funded
reconstruction following the 2011 earthquake and tsunami, which
would save companies 900 billion yen.
Abe also instructed the ruling coalition parties to start
considering a permanent cut in the corporate tax rate, which he
noted was high by international standards.
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.