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No better time to hike sales tax: Mr Yen

There is no better time to raise Japan's consumption tax, former vice finance minister Eisuke Sakakibara, said on Tuesday as a rise in the tax took effect.

Japan's sales tax has been lifted to 8 percent from 5 percent, rising for the first rise in 17 years.

The decision to lift the tax has been controversial and there are concerns that the move comes at a bad time for an economy that is getting back on its feet after a period of deflation and lackluster growth thanks to aggressive monetary and fiscal stimulus.

Read MoreJapan braces for first sales tax in 17 years

"I think there's no better time to raise the consumption tax. The economy has been doing fairly well," said Sakakibara, known as "Mr Yen" for his efforts to influence the yen's exchange rate through verbal and official intervention as a former Vice Finance Minister of Japan in the late 1990s.

"During the last two years, the average rate of growth has been 2 percent, which is quite high for a mature economy like Japan," Sakakibara told CNBC.

An employee places a new price sign on bottles of coffee at an Aeon Co. supermarket in Chiba, Japan.
Tomohiro Ohsumi | Bloomberg | Getty Images
An employee places a new price sign on bottles of coffee at an Aeon Co. supermarket in Chiba, Japan.

Consumers have front-loaded spending for big items such as cars ahead of the sales tax and economists expect this to give the economy a short-term boost before growth slows later this year as the impact of the tax hike takes hold.

Prime Minister Shinzo Abe, who has pledged to revive Japan's economy, has said the tax hike is key to alleviating high debt levels.

Read More Japan sales tax: What you need to know

"It's [the tax hike]going to be a drag obviously, about 1 percent of GDP… But I don't think it's going to be a big shock," said Bank of Singapore Chief Economist Richard Jerram.

Ghosts of 97

Casting a shadow over the tax hike is what happened in 1997. That was the last time Japan raised the consumption tax and it wasn't long afterwards that the economy slipped into recession.

"I don't think 1997 is a good analogue for what is happening in Japan now. There are three key reasons for that," said Alexander Treves, head of equities for Japan at Fidelity Worldwide Investment.

"The first is that back in 1997, the financial system was in significantly worse shape. The second is that in 1997 the consumption tax hike took place against a backdrop of the Asian financial crisis and… the third thing is that the stock market was much more expensive back then," he said.

Treves said that the benchmark Nikkei has probably priced in the impact of the sales-tax hike. Indeed, the Nikkei briefly hit a three-week high on Tuesday before retreating.

The closely-watched Tankan survey meanwhile showed business sentiment among Japanese corporates improved a touch in the three months to March, but was expected to weaken in the months ahead amid concerns about the impact of the sales-tax hike.

Read MoreJapan business sentiment improves a touch: Tankan

Sakakibara, also a professor at Japan's Aoyama Gakuin University, said the government was likely to cut corporate tax and this together with monetary and fiscal stimulus should help buffer the economy.

"A corporate tax cut is being planned and I think it will be implemented in the next year or two," he said. "Japan's corporate tax by international standards is higher by 5-10 percentage points, so the cut would be at least 5 percent.

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