TOKYO (Reuters) - U.S. economist Paul Krugman said on Tuesday he advised Japan’s Prime Minister Shinzo Abe to delay a sales tax increase scheduled for next year and to boost fiscal spending because the economy is still not strong enough to escape deflation.
Abe is meeting overseas economists to help him prepare for a Group of Seven summit that Japan will host in May. Krugman also called on G7 countries to coordinate stimulus measures because many advanced and emerging economies are struggling with low demand.
Krugman’s advice was the same as that which fellow U.S. economist Joseph Stiglitz gave Abe last week. This could cement expectations that Abe will use the G7 talks as a platform to postpone tax increases and announce more fiscal spending.
“Japan still has not achieved escape velocity to break out of its deflationary cycle,” said Krugman, a Graduate Center of the City University of New York professor and Nobel Prize winner.
“I would call for a delay in the consumption tax hike. Japan needs fiscal policy to reinforce monetary policy and not fight it.”
Abe is scheduled to raise a national sales tax to 10 percent from 8 percent in April next year, but some of Abe’s closest advisers are calling for the plan to be shelved.
Abe raised the levy to 8 percent from 5 percent in April 2014, as agreed under the previous government to curb Japan’s big public debt, but the increase triggered a recession and some economists say consumer spending has not fully recovered.
Krugman said weakness in the global economy made it difficult for Japan to solve its economic problems, which made fiscal stimulus a more urgent task.
The G20 called at a summit last month for more fiscal spending and less reliance on monetary policy to help the fragile global economy, which some investors say has reached its limit after years of quantitative easing and negative real interest rates.
Reporting by Stanley White; Editing by Robert Birsel