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Economy

Another sales tax hike a must for Japan: economist Ito

NEW YORK -- Japan needs to raise the consumption tax to 10% next year as planned, economics professor Takatoshi Ito said in a speech Monday, stressing that an added burden is necessary for fiscal consolidation.

Economics professor Takatoshi Ito speaks at the event sponsored by the Nikkei Asian Review.

     Referring to Japan's debt-to-GDP ratio, which exceeds a whopping 200%, Ito warned that "we are clearly on a runaway path of the debt, so we cannot go on like that for much longer."

     Ito, of the National Graduate Institute for Policy Studies, delivered the keynote address at a panel discussion titled "Abenomics: Impacts on Asia and the U.S." The event, held at the Japan Society, was sponsored by the Nikkei Asian Review.

     Explaining the "three arrows" of Abenomics, Ito said the first, monetary easing and inflation targeting, has been a "big success" that has resulted in a correction of the overvalued yen, higher inflation, and higher stock prices. Ito praised the Bank of Japan for adopting a 2% inflation target, a move he had long advocated.

     He also gave high marks to the second arrow: traditional stimulus spending, which has delivered its intended effect of propping up consumption.

     In Ito's view, the April 1 consumption tax hike from 5% to 8% was a positive move in terms of fiscal consolidation. The next challenge comes when Prime Minister Shinzo Abe makes a decision by year-end on whether to raise the tax again to 10% in October 2015.

     Ito stressed that he wants to see Abe go ahead with the increase to realize fiscal health.

     Delay would carry a political cost, Ito said, pointing out that once the planned hike is scrapped, a new attempt to raise the tax later would require legislative action.

     "That consumes his political capital, and I would rather see him using political capital on growth strategy bills," Ito said.

     Ito actually advocates a consumption tax rate above 10%. "If the tax is not raised beyond 10% ... then a fiscal crisis will come in the mid-2020s," he said.

     Touching on Abenomics' third arrow, structural reform, Ito said the growth strategy presented by the government this June is a huge improvement over the one announced last year, which in his view was heavy on big promises but light on substance. Ito is hopeful that Japan will realize the goals outlined this year, such as enhancing corporate governance and increasing the participation of women and foreigners.

     Abenomics has not caused an adverse spillover to the U.S. and Asia, and higher growth in Japan is good for the global economy, he added.

     A panel discussion followed the speech. Ito was joined by Lewis Alexander, managing director and U.S. chief economist at Nomura Securities International. The discussion was moderated by Ken Koyanagi, publisher of the Nikkei Asian Review.

     Alexander said that Abenomics has been successful and expressed optimism over the future. "In a very important way, it has been a success, and it is working," he said, indicating that Japan's monetary policy has been effective.

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