Japan says GDP growth could slow to 1% after sales tax hike

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Japan's economic growth will slow to 1.0 percent in fiscal 2014/15, less than half the pace expected this year, as a planned sales tax hike weighs temporarily on consumption, government forecasts showed.

In fiscal 2013/14, which began in April, Japan's economy is forecast to expand 2.8 percent as an improving labour market bolsters consumer spending and as policies to end 15 years of deflation start to take hold, the cabinet office said.

That is an upgrade from the government's previous forecast of 2.5 percent growth.

Prime Minister Shinzo Abe has to decide this later this year whether to carry out a plan that would raise the 5 percent sales tax to 8 percent from next April and then to 10 percent in October 2015.

(Read More: Japan's sales tax debate could hit the Nikkei)

Private consumption is expected to grow 0.5 percent in fiscal 2014/15, less than the 2.1 percent growth forecast for the current fiscal year, the cabinet office said.

The plan to raise the sales tax will add 0.2 percentage point to gross domestic product (GDP) in fiscal 2013/14 as shoppers rush to buy goods before the first tax hike, according to a cabinet office official.

But the tax increase would then subtract 0.6 percentage point from economic growth in fiscal 2014/15 as consumers scale back purchases, the official said.

Overall consumer prices are expected to rise 3.3 percent in fiscal 2014/15, but excluding the tax hike prices will rise 1.2 percent, the cabinet office said.

(Read more: At last, inflation in Japan is speeding up)

In comparison, overall consumer prices are forecast to rise 0.5 percent in fiscal 2013/14, the cabinet office said.

The sales tax hike is meant to be the first step towards fixing Japan's public debt, which at more than double annual GDP, is the biggest burden in the industrial world.

Abe has made economic recovery and the defeat of deflation his top priorities, but there are concerns he could delay the pace of tax hikes to avoid a slowdown in growth.

The Bank of Japan unleashed an intense burst of monetary stimulus on April 4, promising to double the supply of money through aggressive asset purchases to meet its 2 percent inflation target in roughly two years.