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Politics

Japan's PM vows 'all possible steps' if economy falters

After sales tax hike, Abe hints at possibility of fiscal stimulus

Japan's Prime Minister Shinzo Abe says he is determined to keep the economy on a growth track. (Photo by Uichiro Kasai)

TOKYO (Reuters) -- Japanese Prime Minister Shinzo Abe pledged on Friday to deliver "all possible steps" if risks to the economy intensified, signalling a fiscal-stimulus boost in the event this month's sales tax hike triggers a sharp downturn in growth.

The government rolled out a twice-delayed rise in the sales tax to 10% from 8% on Tuesday, a move that is seen as critical for fixing the country's tattered finances. But there are fears the higher tax could hurt consumer spending and tip the economy into recession.

This has led to speculation that Tokyo will step up fiscal spending, though it has already taken measures to mitigate the pain on consumption, mindful of the severe economic downturn that followed the last increase in the sales tax in 2014.

"Achieving economic growth remains my administration's top priority," Abe said in a speech delivered to an extraordinary parliament session that convened on Friday.

"If downside risks materialise, we will take all possible steps flexibly and without hesitation to ensure the economy is on a growth path," he said.

Abe's pledge to deliver support to the economy echoes that made recently by the central bank, which kept monetary policy steady last month but signalled its readiness to expand stimulus as early as its Oct. 30-31 meeting.

Japan's growth has slowed as the Sino-U.S. trade war dealt a blow to its export-reliant economy, sending big manufacturers sentiment - as measured by the Bank of Japan's tankan survey - to a six-year low in the July-September quarter.

For now, however, Finance Minister Taro Aso dismissed the need to boost stimulus to counter the tax hike impact, despite expectations the government and the central bank may act to reduce pressure on the world's third largest economy.

Speaking to reporters after a cabinet meeting, Aso said he saw no big confusion among retailers and shoppers over the tax hike as corporate earnings and household incomes were solid.

While U.S.-China trade frictions warranted attention, "we are not facing such a situation that stimulus should be taken immediately," Aso said.

Market expectations of further BOJ easing also grew after Governor Haruhiko Kuroda pledged in July to act preemptively. Signs have also emerged recently that its nine-member board may be tilting towards further easing as global pressures intensify.

"We expect the Bank of Japan to maintain its ultra-loose monetary policy settings, and we would not rule out further easing measures if growth falters below their expectations," Fitch Ratings said in a statement issued on Friday.

"We would also not rule out additional fiscal stimulus, possibly from a supplementary budget early next year, to counter cyclical headwinds."

Earlier on Friday, Economy Minister Yasutoshi Nishimura told reporters it was necessary to carefully watch consumption trends as there are worries the hike may weigh on consumer sentiment.

Fitch affirmed Japan's 'A'/Stable rating in July, taking the tax hike and the offsetting measures into account. The tax hike will help reduce Japan's gross general government debt-to-GDP ratio to just over 220% by 2028, from 232% at present - still the highest among Fitch-rated sovereigns.

The ratings agency expects Japan's GDP growth to slow after a strong first half of this year, as external demand weakens due to slowing global growth and the U.S.-China trade war.

Growth momentum likely faltered in the July-September quarter, as highlighted by weakening consumer confidence and slowing purchases of durable goods, it said, adding that it estimates full-year 2019 growth at 0.8%, slowing to 0.3% next year.

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