By Izumi Nakagawa and Stanley White
TOKYO (Reuters) – Japan should spend 10 trillion yen (70 billion pounds) on fiscal stimulus each year for the next five years to offset a decline in consumption expected after a sales tax hike, an adviser to Prime Minister Shinzo Abe said on Thursday.
The government plans to raise the nationwide sales tax to 10 percent from 8 percent in October 2019 to pay for rising healthcare costs.
The sales tax hike will have a big negative impact on consumer sentiment, so the government needs to spend to keep growth on track, Satoshi Fujii, an adviser to Abe, told Reuters in an interview.
“We have done psychological studies showing a tax increase to 10 percent will cause a big decline in consumers’ willingness to make purchases,” Fujii said, citing research at Kyoto University where he is a professor.
“This impact will not be brief. It will last a long time.”
The government should spend money on education, mid-career training and steps that improve corporate productivity, Fujii added.
Japan needs extra tax revenue to pay for ballooning healthcare costs due to its rapidly ageing economy.
It also has the world’s largest debt burden, at more than twice the size of its economy, leaving its public finances in a precarious position.
However, even the slightest increase in tax rates can have deep and long-lasting consequences for Japan’s price-conscious households.
Fujii’s comments suggest the government could rely more on fiscal stimulus, which should contribute to economic growth, in theory, but may give the impression fiscal discipline is slipping.
The government should also spend more money on disaster prevention after damage by earthquakes and floods this year in western Japan, Fujii said.
A spending increase may well be likely after a powerful earthquake paralysed Japan’s northern island of Hokkaido early on Thursday, triggering land slides and power outages.
(Reporting by Izumi Nakagawa; Writing by Stanley White; Editing by Shri Navaratnam)