GO
Loading...

Hiking Japan’s sales tax: why it’s now or never

Yoshikazu Tsuno | AFP | Getty Images

Disappointing second-quarter growth figures from Japan may have heightened calls for the government to delay a controversial hike in the country's consumption tax, but analysts argue that now remains the best time to deliver the measure.

On Monday, Japan logged a third straight quarter of expansion, posting an annualized growth rate of 2.6 percent for the three months to June, but the increase fell short of forecast by a full percentage point.

The data drew opposing opinions from government officials over the plan to raise the sales tax, which is due to increase to 8 percent next April from the current 5 percent, and to 10 percent in October 2015.

(Read more: Japan misses growth forecast in second quarter)

While the adviser to Prime Minister Shinzo Abe, Koichi Hamada, said the weaker-than-expected figures showed the government was in no hurry to raise the tax and could consider delaying the measure by one year, economy minister Akira Amari described the data as "good numbers" which are supportive to the sales tax hike plan.

But analysts CNBC spoke to were united in the view that now is Japan's best window of opportunity for the sales tax hike, with the economy accelerating and while markets are in need of assurance that the government is serious about reducing its debt, which currently measures over 200 percent of gross domestic product (GDP).

"It's true that 3 percent is a hefty rise and there are a lot of doubts but the consequences of not doing it so big, but if we delay, what will be the reaction? We will be delaying the reform of our debt to GDP status. We have to show discipline to a certain degree," said Seijiro Takeshita, director of Mizuho International.

(Read more: Here's the missing piece in Japan's growth puzzle)

"I know it's paradoxical but Japan is a current situation where we have to put on the accelerator and brakes on at the same time," he added.

The International Monetary Fund (IMF) warned recently that the sales hike could slow Japan's growth by 0.3-0.4 percent on an annual basis. Critics have panned the move as too much, too soon, for an economy still struggling to regain footing from the radical growth policies by Prime Minister Shinzo Abe.

But Edwin Merner, President at Atlantis Investment Research Corporation, told CNBC that Monday's data still shows growth, and isn't reason enough for Abe to delay the tax hike.

"He's really got to do it [increase the consumption tax]. If he isn't going to do it now, when is he going to do it? If he doesn't he loses his credibility," said Merner.

According to Michael Kurtz, global head of equity strategy at Nomura , the "tax itself is not a fix" for the economy, as it could hamper growth. Rather, it's the message that Japan has the resolve to push through measures to reduce its debt pile, he noted.

(Read More: Could Japan fall back into recession next year?)

"I do think foreign investors want a credible commitment to moving ahead with fiscal consolidation in Japan. And moving ahead with the tax increase would serve as a statement by the Japanese government that they take their fiscal balances seriously," he said.

"I've heard a lot of comments recently that why would [the government] want to this when the economy is picking up. But the fact is, if you had a choice on doing it when the economy is picking up or when it's on a downturn, you would certainly rather introduce it when the economy is accelerating," he added.

A final decision on the sales tax hike is expected on September 9 following the release of Japan's revised second quarter GDP figures.

- By CNBC's Li Anne Wong. Follow her on Twitter @LiAnneCNBC

Featured

Contact Economy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More