NEW YORK (Reuters) - Japan must embrace strong measures to boost growth, helping the economy withstand an expected consumption tax increase and other efforts to reduce government red ink, a senior Japanese government official said on Friday.
“We need to consider (the) risk that the fiscal condition could deteriorate if the economy is not robust enough to absorb the negative impact of tax increases,” Yasutoshi Nishimura, senior vice minister for economic and fiscal policy at the Cabinet office, said in a speech at the Japan Society in New York.
“So we’ll implement a growth strategy to make the economy resilient to any shocks.”
Nishimura is spending just a day in New York, with a meeting scheduled with New York Federal Reserve Bank President William Dudley.
The government will decide in September whether or not the economy is on a strong enough growth trajectory to absorb the impact of a consumption tax increase. If a tax increase is approved it will go into effect in April of 2014.
Nishimura said recent yen weakness will contribute to stronger growth in coming quarters. “Conditions will be improving quite well from second quarter, so I think the consumption tax will be raised as of next April,” he said.
Japan’s economy grew at a 4.1 percent rate between January and March, suggesting an aggressive stimulus program launched by Prime Minister Shinzo Abe aimed at ending decades of falling prices and stagnant growth was starting to have an effect.
Known as “Abenomics,” the reform process consists of what the government calls “three arrows:” aggressive monetary stimulus, hefty government spending and structural reforms aimed at boosting growth.
The government has also pledged to raise incomes by 3 percent annually, set up special economic zones to attract foreign businesses and is considering a push for public pensions and other public funds - a pool of $2 trillion - to increase returns by raising investment in equities.
Nishimura said the government also intends to overhaul the tax system in a way that encourages capital spending, including tax cuts on corporate investment as well as research and development.
He also said he would like to see corporate tax rates cut to between 20 percent and 30 percent but said this should be secondary to these other tax cuts.
Abenomics began in earnest in April when the Bank of Japan launched an aggressive course of monetary easing, pledging to pour about $1.4 trillion into the economy by the end of 2014. It is also aimed at raising the inflation rate to 2 percent.
That weakened the yen, which in May fell to a 4-1/2-year low near 104 per U.S. dollar, and boosted the Nikkei 225 stock index .N225 to a 5-1/2-year high. A weaker yen makes Japanese goods less costly in overseas markets.
Those moves started to reverse after the U.S. Federal Reserve first hinted in late May that it could start winding down its own monetary stimulus program later this year. Worries about a cash crunch and slower growth in China, Japan’s biggest trading partner, have also weighed on Japanese stocks in recent weeks and pushed up long-term interest rates, a potential threat to growth.
But Koichi Hamada, an economic advisor to Abe and professor emeritus at Yale University said recent volatility is no cause for concern.
“Stock markets are by nature volatile and currencies often overshoot,” adding that the stock market is still more than 30 percent higher than it was before the reforms were announced. The dollar is still up more than 14 percent so far this year.
Nishimura added that “the reason behind Japanese interest rate volatility is probably because the Bank of Japan has never done things like this in the past. I mean, this is really the first time the Bank of Japan did something rather daring. That’s why people really didn’t know how to react to that and I think that is why this volatility came about.”
“However, if people felt the Japanese fiscal policy or discipline will not be implemented, then that expectation ... would push up the interest rates, which is really contrary to the Japanese economic recovery. That is something we really have to avoid.”
The 10-year Japanese government bond yield last traded at 0.86 percent, after hitting a 13-month high of 1 percent in May.
Stronger growth in the United States should also aid Japanese recovery, Nishimura said, even if it prompts the Fed to wind down its own monetary stimulus program in the months ahead.
But he said there could be a risk to the world economy “if the United States is to tighten this monetary supply rather drastically or in a very short, sharp manner.”
Editing by James Dalgleish and Theodore d'Afflisio