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Economy

Japan readies $18bn in stimulus ahead of 2019 tax hike

Government spending faces record amid efforts to boost consumption

A shopper browses merchandise at a discount store in Tokyo. Japan plans consumer incentives to ease a likely slowdown when the consumption tax rises to 10% in October 2019.   © Reuters

TOKYO -- Shopping incentives and infrastructure projects make up the bulk of a 2 trillion yen ($17.7 billion) stimulus package being considered as part of Japan's fiscal 2019 budget, designed to ease the blow from plans to raise the country's consumption tax rate to 10% in October.

Such stimulus appears likely to include a "premium gift card" program to provide shoppers with vouchers offering extra value, at a cost of over 150 billion yen. Another few hundred billion could go toward a 5% cashback program for consumers using cashless payments at small and midsize merchants. The Finance Ministry and related agencies are hammering out the details of the various programs.

Japan's budget could also earmark more than 1 trillion yen for infrastructure work. This year's many natural disasters including flooding in western Japan have prompted plans to spend around 3.5 trillion yen over three years through fiscal 2020 to bolster infrastructure, such as airports and flood walls.

The public works projects are expected to help counter a drop-off in demand after the tax increase.

Other proposals to ease the pain include tax breaks for those buying cars or homes. Select homebuyers could qualify for a one-time payout to help with their purchase.

The government also is considering exempting daily essentials like food and beverages from the higher consumption tax rate.

The Bank of Japan estimates the tax increase will cost households 5.6 trillion yen. But factoring in programs such as free early childhood education shrinks the actual cost to around 2.2 trillion yen. Tokyo looks to this figure as it puts together a stimulus package under the fiscal 2019 budget.

Japan raised its consumption tax rate to 8% from 5% in 2014 at an estimated cost to households of 8 trillion yen. Consumer spending flagged afterward despite 5.5 trillion yen in stimulus spending.

The tax increase is not the only looming risk to Japan's economy, which may slow down after the 2020 Tokyo Olympics. The government could incorporate further stimulus measures under the fiscal 2020 budget, or in any supplementary budget for fiscal 2019.

Japan's perennial challenge of improving its fiscal health, which ranks as the worst among advanced economies, likely will be put on the back burner. Expenditures in the fiscal 2019 budget are expected to top 100 trillion yen, surpassing the record 97.7 trillion yen originally planned for fiscal 2018. Though tax revenue also would rise to a record, helping pay for the stimulus, the issuance of Japanese government bond is expected to cover much of the funding.

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