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Issue More Debt to Boost Japan's Economy: ‘Mr. Yen’

Despite levels of public debt which are already among the world’s highest, Japan must not hesitate to issue more debt to stimulate its economy, Professor Eisuke Sakakibara, former vice finance minister of Japan told CNBC on Monday.

Young businessman who walks with superior
Michael Hitoshi | Photodisc | Getty Images
Young businessman who walks with superior

The country should drop current plans to raise sales tax and replace them with cuts to the corporate tax rate, Sakakibara, who became known as “Mr. Yen” for his market-moving comments as vice finance minister in the 1990s, said in an interview.

At the start of the new fiscal year in Japan, a debate about a sales tax hike is raging, with Prime Minister Yoshihiko Noda arguing it is necessary to fund rising social security costs in the country.

“This consumption tax discussion particularly promoted by Mr. Noda I think is very bad in terms of timing. Japan is just about to recover from the recession of fiscal 2011 which was hit by the earthquake and the tsunami,” Sakakibara said.

“This consumption tax increase discussion would probably have a negative impact on the recovery,” he added.

Monday’s Tankan survey, an indicator of corporate Japan’s health which measures sentiment among large manufacturers was virtually unchanged, in a sign they are still concerned about the yen’s strength.

“We are not sure if the recovery will be robust or not. We may have a continuation of a very weak economy. This is no time to increase taxes, or no time to talk about increasing taxes,” he added.

Instead, he argues, a cut in the corporate tax rate would entice foreign companies to invest in Japan and stimulate growth.

“I think corporate tax should be cut further,” he said.

To fund its expenditures, the country should issue more government bonds, according to Sakakibara.

Japan’s growing national debt has set alarm bells ringing, with the IMF arguing the country needs to push through structural reforms to strengthen its resilience and growth prospects.

But Sakakibara said the country has a way to go before it runs into problems.

“Japan at this moment is not in fiscal problems and despite a very large outstanding amount of debt close to 200 percent of GDP, we have a very large amount of household financial assets, which is about 240 percent of the GDP,” he said.

“So for another four to five years we wouldn’t have any problems in terms of mushrooming debts.” But if the deficit continued as it was at this stage, the country might start to run into trouble in some six or seven years, he said.

“For the time being we should not hesitate to increase the issuance of debt to stimulate the economy. What we need at this moment is stimulative fiscal policy.” If economic conditions do not improve as much as anticipated, it is very likely that the Bank of Japan will engage in further quantitative easing, he said.

“I think Mr Shirakawa does have that weapon at this moment in his hand," he said, referring to the central bank’s governor.