TOKYO Bank of Japan Governor Haruhiko Kuroda on Tuesday reiterated his view that the government must proceed with a planned hike in the country's sales tax to fix its tattered finances.
"The economy may see some fluctuations ... but I don't think the sales tax hike will lead to a slump in the economy or hamper the achievement of the (Bank of Japan's) 2 percent inflation target," Kuroda told a television program.
Kuroda said he acknowledged the challenges he faced in trying to pull Japan out of 15 years of deflation but stressed the central bank will do "whatever needed" to achieve that goal.
He also said he was convinced that Japan's economy will recover, saying that improvements in the economy were proceeding and were likely to broaden.
"The positive cycle of output, income and spending is already starting," he said.
Kuroda's remarks came amid an intensifying political debate on whether Japan should proceed with a planned two-stage hike in the sales tax from next year, or opt for a more moderate rise to ease the pain on an economy just emerging from stagnation.
Abe, who is wavering on whether to proceed with the scheduled tax hikes, and his ministers will hold meetings next week with business leaders and academics to assess the impact on the economy. He will decide by early October.
Japan's economic growth slowed more than expected in the second quarter, data released last week showed, offering ammunition to those seeking to temper a planned tax increase.
Abe's government is divided on the sales tax, with reflationist advisers urging him to delay or water down the increase and the Finance Ministry avidly urging him to proceed, given the nation's dire finances. Japan's public debt exceeded 1 quadrillion yen - or 1,000 trillion yen, about double GDP, for the first time in June.
The BOJ has consistently called for government efforts to restore Japan's finances, warning that failing to do so could trigger an unwelcome spike in bond yields.
"Japan can achieve both economic growth and a sales tax hike ... or rather, restore fiscal health. That must be done," Kuroda said. "Delaying (efforts for fiscal reform) will cause troubles in the future."
The BOJ unleashed an intense burst of monetary stimulus in April, pledging to nearly double the monetary base to 270 trillion yen ($2.8 trillion) by the end of 2014 via aggressive bond purchases to end deflation and achieve its 2 percent inflation target. It has stood pat since then.
The central bank has said its aggressive government bond purchases could be interpreted by markets as monetizing debt unless accompanied by government efforts to rein in spending and issuance of government debt.
(Reporting by Leika Kihara; Editing by Edmund Klamann)