WRAPUP 4-Japan sets ambitious fiscal goals, eyes tax hike

* Fiscal plan: eyes primary budget surplus by 2020/21

* Fiscal plan: aims to lower debt-GDP ratio after 2021/22

* Cabinet Office: targets won’t be met with just econ
growth

* Fiscal plan calls for early decision on tax reform

* Govt has no choice but to raise tax to fix debt –
analysts
(Recasts)

By Tetsushi Kajimoto

TOKYO, June 22 (BestGrowthStock) – Japan set ambitious targets to
rein in its debt on Tuesday that it said could not be met even
under its rosiest growth scenario, the latest indication that
the government will have to push through contentious tax hikes
to fill deep fiscal gaps.

In a sharp turnaround from his predecessor, new Prime
Minister Naoto Kan has made fiscal reform a top priority ahead
of a July 11 upper house election, vowing to consider doubling
the 5 percent sales tax, although not for at least two or three
years.

“As shown by the Greek example, the market’s view on the
size of outstanding public debt or sovereign risk has become
very severe,” Kan said in a televised debate with other party
leaders.

“If we could sustain the social welfare system forever by
issuing deficit financing bonds, there would be no need to
bring up the issue of the sales tax,” he added. “But if left
alone, our social welfare system will collapse.”

Credit ratings agency Moody’s welcomed the plan as a step
in the right direction to fiscal health, but analysts said the
long-mooted rise in the consumption tax was vital for the
targets to be met. [ID:nSGC003626]

Indeed the Cabinet Office’s projections showed that it
would not be able to bring the primary budget balance into the
black within a decade, as outlined in the fiscal plan, under
the government’s growth strategy, which aims for an average 2
percent real growth by fiscal 2020/21. [ID:nLDE65H01Q]
[ID:nTOE65K0A0]

Investors will be watching to see how the tax reform debate
progresses after the upper house election, which Kan’s
Democratic Party needs to win to smooth policymaking.

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Graphic on Japan finances http://r.reuters.com/sez92m

Graphic on primary balance http://r.reuters.com/myd23m

Graphic on debt-to-GDP ratio http://r.reuters.com/neh98h

More stories on the Japanese economy [ID:nECONJP]

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Tuesday’s plan did not factor in any tax hikes but said the
government should reach an early conclusion on overhauling the
sales tax and other taxes.

The fiscal programme supported government bond prices, with
the benchmark 10-year futures prices (2JGBv1: ) edging near a
two-year high hit earlier this month.

“A hike in the consumption tax was politically taboo in the
past. Now it is becoming more realistic. That’s one reason
behind JGBs’ firmness,” said Katsutoshi Inadome, a fixed-income
strategist at Mitsubishi UFJ Morgan Stanley Securities.

“That’s not to say investors are convinced that fiscal
reform will succeed. They are watching whether the government
can carry out the reform,” he added.

COALITION DYNAMICS

Ratings agencies have threatened to cut Japan’s sovereign
debt rating unless it shows a credible plan to rein in its
debt.

“The mention of tax is implicit recognition that something
along the lines of a tax hike would be necessary,” said David
Cohen, director of Asian economic forecasting, at Action
Economics in Singapore.

Economists say the government needs to commit to raising
the sales tax to 15 percent or even 20 percent over the next 10
to 15 years to pay for rising social welfare costs and a
commitment to hike tax is needed to make its fiscal plans look
credible. But many also worry tax hikes could hurt growth.
[ID:nTOE65K02U]

The plan lacked specific ideas of how to meet its long-term
aim of achieving budget balance targets and reducing its
debt-to-GDP ratio — now estimated at nearly twice the size of
GDP, the worst in the developed world.

Kan has put a debate on a consumption tax hike at the heart
of the Democratic Party’s campaign for the upper house poll,
which the party needs to win to ensure smooth policymaking.

Coalition dynamics could complicate the push for fiscal
reform if the Democrats fall short of a majority in the upper
house, which can delay bills, although analysts say a future
sales tax rise is inevitable.

“At the end of the day, most people realise that a rise (in
the sales tax) is a question of time. It has to be done at some
time and the question is the timing and what should be done
first,” said Koichi Nakano, a Sophia University professor.

Japan’s 5 percent consumption tax rate is among the lowest
in major economies. It compares with 17.5 percent in Britain,
19 percent in Germany and Greece, 10 percent in South Korea as
of January 2010. New York City imposes a 8.875 percent sales
tax, according to the Cabinet Office.

The government pledged to do its utmost to keep new debt
issuance in the year to next March at or below about the 44
trillion yen ($483 billion) that has been earmarked for this
year, while aiming to steadily reduce bond issuance thereafter.

The government still has a massive pool of bank deposits to
fund its deficits in the near term. But fears that this could
change in the long term as an ageing population starts drawing
on savings have led to a rise in demand for protection against
the risk of default in Japanese government bonds in the credit
default swaps market. [ID:nTOE651066]

To ease such concerns, the plan calls for Japan to bring
its primary budget balance into the black within a decade — a
goal it has not met since the bursting of an asset bubble early
in the 1990s. The primary budget balance, which excludes
revenue from bond sales and debt-servicing costs, is estimated
at 30.8 trillion yen, or 6.4 percent of GDP in the current
fiscal year.

From fiscal 2021/22 the government will aim to stably lower
the debt-to-GDP ratio.

Stock Market Report

(Additional reporting by Yoko Nishikawa, Stanley White,
Hideyuki Sano and Linda Sieg; Editing by Edwina Gibbs &
Kazunori Takada)

WRAPUP 4-Japan sets ambitious fiscal goals, eyes tax hike