June 21, 2010 / 1:05 AM / 9 years ago

Tax hikes spur growth, end deflation says Japan PM adviser

TOKYO (Reuters) - Japan should “substantially” raise its sales tax and other taxes from next year to create jobs and beat deflation rather than seeking further monetary easing, an economic adviser to Prime Minister Naoto Kan said.

Osaka University Professor Yoshiyasu Ono said the Bank of Japan needs to keep its current easy policy but printing more money would not resolve the problem of persistent price falls.

Ono advocates using revenues from tax rises to create new demand and jobs, which he said would help beat deflation and fix Japan’s fiscal woes, a theory reflected in a “Third Way” growth model advocated by the prime minister.

“The consumption tax should be raised as early as next year,” Ono, who has been appointed an adviser at the Cabinet Office, told Reuters in an interview on Friday.

“Substantial tax hikes are needed if we are to create new jobs and cut the jobless rate to 3 percent” from the current 5.1 percent to maximize employment needed to spur consumption and beat deflation, he said.

Kan, 63, who has made fiscal reform a top priority since taking office this month, has cited a possible doubling of the sales tax to 10 percent to curb Japan’s debt, which is twice the size of its GDP, the worst in the developed world.

Ono became acquainted with Kan a decade ago and has advised him on economic policy in earnest since taking up the job at the Cabinet Office in February.

Ono, 59, said the income and inheritance tax rates also need to be raised so the rich shoulder more of the tax burden.

“The point is that revenues from tax hikes should be spent on creation of new jobs, not repayment of public debt,” Ono said.

Tax hikes should not cause a financial burden on the people because all the increases are immediately returned to them through salaries for the jobs created, he said. They also benefit from the newly created services.

“In addition, the increase in employment reduces deflation and removes employment insecurity, which in turn stimulates households’ consumption,” he said.

“Thus, social service provision, job increases, economic growth, and tax revenues increase are all achieved,” he said, shrugging off worries by some that tax hikes could cool consumption and tame growth in the near term.

Ono also rejected concerns by some economists that the “Third Way” policy could pave the way for big government.

“I’m not opposing regulatory reforms or calling for increases in the number of public servants,” he said.

The key is to let people work in areas such as nursing care and social infrastructure development, where public support is needed but would not crowd out private-sector initiatives, he said.

Ono said such policies as adopted by Kan were an antidote both to the traditional big spending on public works of the ousted Liberal Democratic Party and the supply-side stance of LDP maverick Junichiro Koizumi during his 2001-2006 term as premier.

While Japan has been plagued by lack of demand since the bursting of its asset bubble in the early 1990s, Ono argued that the LDP’s growth models had failed to fill a gap between supply and demand in the economy and to resolve the problem of deflation.

“Deflation can be beaten only by reducing the deflationary gap through expansion in aggregate demand and employment,” he said, adding that expansion of the monetary base has not led to an increase in consumer prices since the bursting of the bubble.

“The BOJ has been expanding credit to its maximum, so the government should not press the BOJ to take further action. It can only ask the central bank to keep its current easy policy.”

Additional reporting by Yoshifumi Takemoto and Sumio Ito

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