By Leika Kihara and Yoshifumi Takemoto
TOKYO (Reuters) – The fallout from the U.S.-China trade war on Japan’s economy will be a key factor in deciding whether to proceed with a scheduled sales tax hike this year, a senior Japanese ruling party official said on Friday.
Prime Minister Shinzo Abe has repeatedly said he will go ahead with a twice-delayed increase in the sales tax in October unless the economy is hit by a shock on the scale of the collapse of Lehman Brothers in 2008.
Katsunobu Kato, head of the Liberal Democratic Party’s general council and a close aide of Abe, said such a crisis was hard to predict, and global growth was likely to rebound later this year.
“If the economy remains in a state it is now, the government will proceed with the tax hike as scheduled,” he told Reuters.
But Kato said the government must scrutinize developments in U.S.-China trade talks and their impact on Japan’s economy, warning that it was “unclear” whether the two countries could narrow differences at a summit scheduled to be held on the sidelines of a Group of 20 leaders’ meeting next month.
“The biggest factor to look out for is the U.S.-China trade friction,” Kato said. “Global economic developments change all the time, so we need to watch out for them.”
A recent mixed batch of economic data has kept alive speculation that Abe could put off the increase in the tax rate to 10 percent from 8 percent, despite repeated assurances by senior government officials.
If the higher levy hurts the economy too much, the government can take steps to prop up growth, Kato said, while adding that in terms of policy tools “unfortunately Japan doesn’t have that many options left.”
The Bank of Japan could be called upon to help revive the economy depending on how severe the shock is, though it was up to the central bank to decide what steps it takes, he added.
“Any policy step would come at a cost, so it will be a decision the central bank makes” balancing the merits and demerits, Kato said.
Kato also said there was no change to the government’s endorsement of the BOJ’s efforts to achieve its elusive 2 percent inflation target.
“We’re not in a stage where the government needs to ask the BOJ to drop its 2 percent inflation target,” Kato said.
Years of heavy money printing have failed to drive up inflation to the BOJ’s target. Prolonged easing, instead, has drawn criticism from financial institutions for narrowing margins, raising calls from some lawmakers to drop the target or make it a less rigid one with room for some allowances.
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