Sales tax rise to hit Japanese growth Japan's economic recovery will slow to a crawl next year if Prime Minister Shinzo Abe approves a planned sales tax increase, the government suggested on Friday. The cabinet office forecast that the economy would grow at only 1 per cent in the fiscal year starting in April if the government proceeds with the first phase of a two-stage plan to raise the consumption tax from 5 per cent to 10 per cent by 2015. IN Japan The looming decision on the tax is one of the thorniest issues facing Mr Abe and his young administration. His own advisers have lined up on both sides of the issue, with opponents warning that it will partly negate the impact of "Abenomics" - his three-pronged policy to inflate the economy. The cabinet office also raised its forecast for the economy this year to 2.8 per cent from 2.5 per cent. While the estimates highlighted concerns about the controversial tax, they implied that Japan would avoid a severe sales tax-related recession, suggesting their value as ammunition for opponents of the rise may be limited. A final decision on the plan's first phase - a rise from 5 to 8 per cent next spring - must be made by October, and could come earlier. The long-debated measure is intended to shrink the budget deficit and tackle a gross public debt that is almost 250 per cent the size of the economy, the highest ratio in the developed world. But there are concerns that the increase could derail the economic recovery, and even worsen the deficit problem by lowering overall consumption - bringing the government less revenue even with a higher tax rate. Private economists are also split on the potential consequences. A survey of their forecasts by Bloomberg suggested there was a 30 per cent chance that Japan would fall into recession if stage one were to be implemented next year. Kyohei Morita of Barclays Capital believes the economy would shrink in the two quarters following the April 1 implementation date near year. But he adds that postponing or cancelling the move might "be interpreted an indication of the people's intolerance to tax hikes," which could rattle markets by casting doubt on Japan's fundamental willingness to tackle its debt pile. Many Japanese policy makers remain haunted by the country's last sales-tax rise, in 1997. Enacted in the face of a worsening Asian financial crisis, it is widely believed to have tipped the economy into a severe recession. Koichi Hamada, a Yale academic and close adviser to Mr Abe, has suggested postponing next year's planned rise or proceeding in smaller increments, perhaps 1 percentage point a year. But other officials have called for pressing ahead. Haruhiko Kuroda, the Bank of Japan governor who is propelling the boldest component of Abenomics, on Monday said the economy would not suffer a significant setback even if the full two-phase increase were implemented. Preliminary gross domestic product figures for the quarter to the end of June, due on August 12, are expected to influence Mr Abe's decision. The economy grew at an annualised pace of 4.1 per cent in the quarter to the end of March, the fastest rate among the Group of Seven countries, aided by Abenomics" cocktail of monetary and fiscal stimulus. Economists" forecasts for April to the end of June centre on growth of about 3 per cent, slower than the previous quarter but still above the Japanese average in recent years. Part of the predicted tax-related slowdown would be a result of a shift in the timing of consumption, rather than an overall suppression of demand, the government said. Some people would move up purchases of big-ticket items, such as cars and houses, to before the tax took effect. That would both lift consumption immediately before the implementation date and exacerbate the expected post-tax fall. One solution for Mr Abe could be to cushion the blow of any tax increase with short-term government spending. Economists have suggested that a stimulus budget of Y4-5tn, about half the size of a spending package Mr Abe introduced in January, could offset the tax's likely negative impact on consumption.