The Japanese Prime Minister expressed his determination to “take necessary action” to keep the economy afloat as Japan increased its sales tax on Tuesday for the first time in 17 years.
Japan’s sales tax rose from 5 percent to 8 percent.
Tuesday’s increase is the first stage of the two stage hike ahead of reaching a final target of 10 percent sales tax in 2015 if the economic situation allows.
It is the first such increase since 1997, when the combination of a tax hike, an unwinding of debt from Japan’s bubble economy days and the impact of a regional financial crisis plunged the country into recession.
Economists expect the hike to slow but not derail the recovery of the world’s third-largest economy.
It’s a gamble Japan cannot afford to take, given its soaring public debt.
Ryoji Musha, advisor at Deutsche Securities, said on Tuesday that the situation now is different from 1997 due to Shinzo Abe’s economic policy.
The “Abenomics” strategy aims to spur inflation and pull Japan out of its two-decade economic slump by getting consumers and businesses to make purchases sooner rather than later,” he said.
But so far wages have not risen, and the rising cost of living seems to be triggering still more belt-tightening.
The tax hike is needed to help cover soaring costs for pensions and health care as well as massive government stimulus spending meant to force the economy out of the doldrums.
Japan’s gross public debt is more than one quadrillion yen (about 10 trillion US Dollars), or nearly 250 percent of gross domestic product.
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