May 31, 2016 / 6:51 AM / 3 years ago

S&P says Japan sales tax hike delay makes 'some sense'

TOKYO (Reuters) - Delaying a sales tax increase in Japan scheduled for April next year makes “some sense” as it could push the economy into several quarters of anemic growth, making it hard to raise revenue, a senior Standard & Poor’s executive said on Tuesday.

Weaker growth resulting from faltering consumer spending would jeopardize the government’s goal of returning to a primary budget surplus, which excludes new borrowing and debt servicing costs, in fiscal 2020, Kim Eng Tan, S&P’s Asia-Pacific senior director of sovereign ratings, told Reuters in an interview.

Although Prime Minister Shinzo Abe has yet to declare his intentions regarding the planned sales tax hike, sources have told Reuters that he will delay the planned increase to 10 percent from 8 percent by two and a half years to October 2019.

The risk of the tax increase pushing consumer spending even further down and possibly hastening a return to deflation persuaded Abe in favor of delaying, the sources said.

“It does make some sense, because what you aim to achieve by introducing at tax hike is to generate more revenue,” Tan said.

“We also have to recognize the current economic environment is relatively uncertain and the yen has appreciated quite a lot since the end of last year, which puts some pressure on growth.”

Delaying the tax hike would not be an indication that Japan’s government is giving up on fiscal consolidation, Tan said.

Abe has already delayed raising the sales tax once after the earlier increase to 8 percent from 5 percent in April 2014 hit consumption and knocked the economy into recession.

Tan said the government needed to introduce bolder structural reforms to push up growth and consumer prices in order to generate revenues as there was limited room to expand fiscal and monetary policy.

Tan’s comments could ease concerns about sovereign credit ratings downgrades and a potential spike in yields in the Japanese government bond market.

Japan’s debt-GDP ratio is the world’s worst, standing at more than twice the size of Japan’s $5-trillion economy.

“One of the reasons why the budget deficit has been so big is because inflation hasn’t been positive, so revenue that depends on wages and profits is not growing,” Tan said.

“On the other had, spending is growing steadily because of social (welfare) commitments.”

In September last year S&P cut its rating on Japan to A+ from AA-, which is four notches below its top rating of AAA, because it doubts the government’s will reverse economic deterioration. The agency raised its outlook to stable from negative.

Reporting by Stanley White; Editing by Simon Cameron-Moore

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