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Japan in sales tax hike

April 1, 2014

The Japanese government has introduced a sales tax hike meant to stabilize state finances. But some experts have warned that the measure could easily turn into a risk for an already shaky economic recovery.

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Japanese yen, coins and banknotes
Image: picture alliance/ZB

Japan raised its sales tax to 8 percent from 5 percent Tuesday in a move designed to help consolidate state finances. The measure marked the first such increase since 1997, when a combination of the tax hike and the impact of a regional financial crisis plunged the Asian nation into recession.

This time around, the measure is not without risks either, since the hike may result in a higher-than-expected drop in consumer spending, as compensating wage increases have so far been rare across the country.

Prime Minister Shinzo Abe promised 5 trillion yen ($48 billion, 34.9 billion euros) in fresh stimulus for the economy and will probably shell out even more if the higher tax proves a harsher blow then Tokyo expects.

Setting priorities

"I have to ask citizens to accept the increase," Abe said in a statement. "It's for the sake of the country."

Wages rise in Japan

The government argued the tax hike was needed to help cover soaring costs for pensions and health care. Japan's gross public debt currently amounts to an alarming 250 percent of gross domestic product (GDP).

"Japan's consumers continue to face severe headwinds as strong employment gains remain insufficient to compensate for falling real wages," Capital Economics analyst Marcel Thielant commented.

Household spending fell by 1.5 percent in February, with experts expecting a rebound for March due to a rush of last-minute purchases before the sales tax increase.

hg /tj (AP, dpa)