Japan's Aso signals tax hike delay, says must not happen again

TOKYO (Reuters) - Japanese Finance Minister Taro Aso said on Tuesday that raising the sales tax is unavoidable to rein in the country’s massive public debt, but signaled that Prime Minister Shinzo Abe is set to delay a second tax increase scheduled for next year.

Japan's Deputy Prime Minister and Finance Minister Taro Aso attends a news conference after attending the Asia-Pacific Economic Cooperation (APEC) finance ministers meeting in Beijing October 22, 2014. REUTERS/Kim Kyung-Hoon

The world’s third-largest economy unexpectedly slipped into recession in the third quarter, data showed on Monday, setting the stage for Abe to delay the unpopular sales tax hike and call a snap election next month - two years before he has to go to the polls.

Aso, who as finance minister had continued to call for proceeding with the tax hike as planned, said Japan must eventually raise the sales tax, “regardless of timing”, to pay for the country’s burgeoning social welfare costs.

“The Bank of Japan’s ultra-loose monetary policy is based on the assumption that Japan will proceed with efforts to restore its fiscal health,” Aso told a news conference after a regular cabinet meeting.

He added, though, that if the prime minister were to delay next year’s sales tax hike, the government must give assurances to markets that it won’t postpone the tax increase again.

Removing a clause in current law, which allows the government to delay the tax hike if economic conditions are too severe, would be one option to reassure investors that the increase would not be postponed again, Aso said.

“It’s better to have some form of guarantee,” he said.

Abe has said he would scrutinize third-quarter economic data in deciding whether to proceed with the second increase in the sales tax to 10 percent in October next year, as part of a plan to curb Japan’s huge public debt.

Japanese media have said Abe could announce his decision to delay the hike for 18 months as early as Tuesday and state his intention to call an election for parliament’s lower house. Ruling party lawmakers expect the poll to be held on Dec. 14.

If the poll were staged on that date, it would be hard for the government to compile the state budget for the next fiscal year by the end of this year, Aso said.

Aso said the government would prioritize passing through parliament a supplementary budget for the current fiscal year to fund a stimulus package, which media reports have said could be worth 2-3 trillion yen ($17-$26 billion).

Economic Minister Akira Amari, who will be charged with compiling any stimulus package to aid households hurt by the first sales tax hike in April, told reporters that Abe had not given any instructions yet on the matter.

(This story has been refiled to fix a typo in the headline)

Additional reporting by Stanley White; Editing by Alex Richardson