TOKYO Japan's economy will remain on track as the government prepares a 5 trillion yen ($50.6 billion) stimulus package to offset the drag from a sales tax increase scheduled for next April, a Reuters poll showed.
Economists expect the majority of the stimulus package to be spent on infrastructure and tax breaks for the corporate sector, the poll conducted October 10-15 showed.
It also concluded that Prime Minister Shinzo Abe's government should take additional steps to ease regulations and encourage new markets for goods and services to lift the country's potential growth rate.
"Although details of some spending measures will be determined in December, we estimate these fiscal measures will largely offset the negative impact from the consumption tax hike," Nomura Securities economists said in a note to clients.
"We expect the policy focus to shift to the growth strategy, which the government will start to enact in the next Diet (parliamentary) session that convened on 15 October."
The world's third-largest economy is forecast to grow 2.8 percent in the fiscal year to March 2014, a Reuters poll of 26 economists showed. That was unchanged from last month's poll.
Growth is expected to slow to 0.9 percent in the following fiscal year as an increase in the sales tax in April to 8 percent from 5 percent will temporarily slow consumer spending.
By comparison, economists last month said growth would slow to 0.7 percent next fiscal year.
In fiscal 2015, the economy will grow 1.1 percent, slower than 1.5 percent growth predicted last month.
Japan's government earlier this month agreed the stimulus package, which will include tax breaks for home purchases and a small cut in the corporate tax rate.
However, the government still has to decide how to spend more than half of the money and will not announce final details until early December.
The increase in the sales tax, which is earmarked for welfare and healthcare spending, is the biggest effort in nearly two decades to contain a public debt that, at more than twice the nation's annual economic output, is the biggest in the world.
The government's decision to couple the tax hike with stimulus spending does not raise concerns about fiscal discipline, economists in the Reuters poll said.
However, the government still needs to cut welfare spending and avoid big cuts in the corporate tax rate to ensure there is progress in lowering the debt burden, some said.
The Japanese yen and its stock market have benefited from Prime Minister Shinzo Abe's expansionary policies. Having lost as much as 18 percent by mid-May, the yen is currently down around 12 percent on the year, a boon for currency-sensitive exporters.
The Nikkei is expected to gain almost 50 percent this year, marking its biggest annual rise in more than four decades, a Reuters poll showed last week.
Still, the latest poll showed Japan needs more measures to boost its potential growth rate, as the Bank of Japan is trying to guide the economy out of deflation with monetary easing and achieve its 2 percent inflation target in the next two years.
The poll showed that Japan's core consumer prices were expected to rise 0.8 percent for the fiscal year starting April 2014 and 0.9 percent for fiscal 2015, excluding the effect of the expected sales tax hike.
That is little changed from last month's poll, showing economists still expect the BOJ will face difficulty in meeting its price target.
($1 = 98.8650 Japanese yen)
(Polling by Hari Kishan; Editing by Kim Coghill)