JAPAN'S most significant fiscal reform in years - a planned increase in the country's sales tax - could be delayed or watered down in a move that might rattle financial markets and amount to an own goal for the prime minister.
Despite holding the strongest political mandate of any prime minister in Japan in years, there are signs Shinzo Abe is seriously rethinking the plan out of concern it could derail a nascent economic recovery he has crafted with an aggressive policy mix, dubbed Abenomics.
Abe says he will decide in the autumn whether to proceed with the first part of the two-stage plan after gauging the state of the economic recovery, especially GDP data that is due on September 9. The tax, similar to general sales tax and value added tax in other countries, is due to rise to 8 percent in April 2014 and 10 percent in 2015.
Abe does not want to raise the tax, given the likely economic and political repercussions, but he understands the risks of upsetting the markets by giving the appearance of backtracking on promised reform, said a person involved in crafting economic policies. At 5 percent, Japan and Canada have the lowest equivalent consumption taxes in the Organization for Economic Cooperation and Development, OECD data shows.
The stakes in Japan are high. The tax hike was passed into law last year with the support of Abe's coalition parties and the previous government and is meant to be the first step toward repairing Japan's tattered finances. But the law also requires the government to judge the economic conditions before giving the final go ahead.
Reneging on fiscal reform could hit investor confidence, which has allowed Tokyo to borrow money cheaply even though its US$5 trillion public debt, well over twice the nation's annual economic output, is the heaviest burden in the industrial world.
At the same time, Abe has stressed that his top priority is to rouse Japan from 15 years of deflation and tepid growth through his Abenomics program of heavy government spending, massive monetary easing and promises of a longer-term growth strategy.
