October 29, 2014 / 2:36 AM / 4 years ago

Japan sales tax hike plan may be negative if it harms economy: S&P

TOKYO (Reuters) - Japan’s plan to raise its sales tax for the second year in a row next year may not be positive for the country’s credit rating if it snuffs out any chance of economic recovery, a senior official of Standard & Poor’s said.

If the government were to delay next year’s tax increase, it would still need to cut welfare spending and push through structural reforms to accelerate economic growth, Takahira Ogawa, director of sovereign ratings at the agency, said.

The chance of a downgrade has receded since Prime Minister Shinzo Abe took office in 2012 with bold plans to end deflation, but the credit outlook is still negative due to uncertainties about how to fix the budget deficit and get the economy to grow, he said.

The Bank of Japan’s monetary easing could become a negative factor for the sovereign rating if the scheme is kept in place too long, because it would become too difficult for the central bank to unwind its large purchases of government debt, he said.

“In general, it is better to raise taxes, but in Japan’s case it may not be a positive if the shoots of recovery are killed off,” Ogawa said in an interview.

S&P has an AA- rating on Japan, which is three notches from the top rating of AAA. S&P’s rating on Japan has a negative outlook, meaning a downgrade is possible.

Ogawa’s comments suggest that a delay in sales tax hikes would not trigger an immediate downgrade, but he did express concern about whether the government can cut spending and shift the economy into a higher gear.

Abe’s government raised the national sales tax to 8 percent from 5 percent on April 1 to pay for healthcare and welfare spending, but consumer spending and factory output has suffered since this tax increase.

Another sales tax hike to 10 percent in scheduled for next year, but some politicians want this plan to be delayed. Abe has to make a decision by year-end, and some cabinet ministers are hinting that more stimulus spending may be needed to help the economy.

Tax increases alone will not do much to reduce the debt burden, unless Japan cuts welfare and healthcare spending, Ogawa said.

Japan’s debt burden is the highest in the world at more than twice the size of its $5 trillion economy.

Much of this debt was racked up as successive governments tried to pump-prime the economy during 15 years of deflation, and now Abe’s government is struggling with the need to balance growth and fiscal consolidation.

If the government delays next year’s sales tax increase, there is a risk that it will continue to delay it indefinitely, Ogawa warned.

If economic growth accelerates, this could offset the negative impact of a delay, but there are no guarantees as it is still unclear whether the private sector will boost much-needed domestic investment, he said.

The government bond market is likely to remain stable if the tax hike plan falters, because under the BOJ’s quantitative easing it is buying the equivalent of about 70 percent of newly issued debt, Ogawa said.

A string of political funding scandals has rocked Abe’s government recently and a decline in his approval ratings has raised questions about his grip on power.

If the situation deteriorates and Abe’s position as prime minister becomes unstable, then this could potentially be a negative for Japan’s sovereign rating as reforms needed to curb welfare spending and reverse the ageing population would likely stall, Ogawa warned.

Editing by Jacqueline Wong

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