Asia Economy

Japan's Abe to rule on sales tax rise: Will he, won’t he?

Scott Eells |Bloomberg| Getty Images

After weeks of heated debate over whether to press ahead with a controversial sales-tax increase, Japanese Prime Minister Shinzo Abe appears poised to rule in favor of the move, which is seen as crucial to curbing Japan's soaring national debt.

The consumption tax is due to rise from 5 percent to 8 percent next April and Abe is widely tipped to approve the hike on October 1, when his decision on the matter is due.

(Read more: Japan's consumer inflation rises to a 5-year high)

"A rise in the sales tax is a done deal," said Bank of Singapore Chief Economist Richard Jerram. "[Policymakers] have more or less said they will go ahead with the rise and a stimulus package to buffer the impact."

According to recent media reports, the government could unveil an economic stimulus package worth about 5 trillion yen ($50 billion) next week with possible corporate tax cuts to offset any negative impact on the economy from a sales-tax hike.

Still, Japanese Finance Minister Taro Aso said he was not considering a cut in Japan's corporate tax rate for now, Reuters reported on Friday.

Why Japan's CPI data isn't cause to celebrate
Why Japan's CPI data isn't cause to celebrate

"What is good is that the consumption tax rise has been well signaled. Economic data will now be significant and the Bank of Japan's (BOJ) reaction will be the most important thing," said Manpreet Gill, senior investment strategist at Standard Chartered Bank.

There has been some talk that the BOJ could ramp up its aggressive monetary easing program to help buffer the economy.

The BOJ is scheduled to hold a monetary policy meeting next week although economists do not expect any immediate reaction to a decision on the consumption tax.

Controversial move

While Abe came to power late last year with a pledge to put the world's third-largest economy back on its feet after almost two decades of deflation and weak economic growth, some of Abe's senior ministers have openly said a tax hike could derail those efforts.

Japanese lawmaker Hideki Makihara, a member of the ruling Liberal Democratic Party, told CNBC earlier this month that, from an economic point of view, a rise in the consumption tax may "not be good for us."

(Read more: Doubts over plan to raise Japan sales tax linger:Lawmaker)

Abe's third arrow moving in the right direction
Abe's third arrow moving in the right direction

However, analysts say the economy should be able to weather a rise in the sales tax as economic stimulus measures should help and there are signs of a recovery taking place. The quarterly Tankan survey of business confidence due out next week is expected to confirm improving sentiment.

"The economy seems strong enough to sustain a hike in the sales tax," Richard Okuno, director at GI Capital Securities, told CNBC. "So what the package is in terms of a reduction in corporate tax rates and further stimulus should be enough to offset the rise [in the sales tax]."

Raising the sales tax is seen as key to alleviating pressure on Japan, which has a national debt more than twice the size of its economy.

(Read more: Japan sales tax hike masks bigger problem of welfare spending)

"Pushing ahead with the sale tax rise should enhance Abe's credibility as it is a difficult decision that he could have backed away from saying he wants to get the economy more time," said Bank of Singapore's Jerram. "I don't know if he's just lucky or clever, but things do seem to be going his way."

—By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC