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Japan raises sales tax, balancing debt, growth

TOKYO — Japan raised its sales tax Tuesday, moving to stabilize government finances but at the risk of undermining a shaky economic recovery.

It's a gamble the world's No. 3 economy cannot afford to take, given its soaring public debt.

Economists expect the sales tax hike, to 8 percent from 5 percent, to slow but not derail the recovery. It is the first such increase since 1997, when the combination of the 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.

But recent data suggest the recovery may be less solid than Prime Minister Shinzo Abe had hoped for when he agreed to raise the tax last fall.

A quarterly central bank survey of Japan's major manufacturers released Tuesday, the "tankan," showed business confidence rose slightly, but was well below forecasts. The outlook for coming months was less rosy, with many companies worried over a consumer backlash following the tax hike.

The 'Abenomics' economic 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. But so far wages have not risen, and the rising cost of living seems to be triggering still more belt-tightening.

Abe has promised 5 trillion yen (US$48 billion) in fresh stimulus for the economy, and still more if the tax hike proves a harsher blow than the government expects. In theory, rising consumer demand should help push wages higher, especially given the shrinking of Japan's labor force as its population falls and ages. But while some major manufacturers have raised wages slightly, employers overall have instead increased overtime work and hiring of part-time workers.

"Japan's consumers continue to face severe headwinds as strong employment gains remain insufficient to compensate for falling real wages," Marcel Thieliant of Capital Economics said in a report Tuesday.

While some better-off Japanese have splashed out on luxury goods and vehicles, most consumers remain wary.

Housewife Kyoko Takahashi, 77, doing her daily shopping in the vegetable section of a supermarket in Urayasu, a Tokyo suburb, believes buying ahead wouldn't result in much of a saving overall.

"Besides, I could end up buying something which I don't need," she said.

Ahead of Tuesday's hike, Japanese television networks and newspapers ran features about which products to buy in advance, generally big ticket items where the cost increase will pinch most. The consensus: hoarding relatively cheap daily necessities such as toilet paper and soy sauce makes little sense for typically cramped homes with limited storage space.

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In this March 27 photo, a customer looks at products at a bargain sale prior to the tax hike at a supermarket in Shin-Urayasu.

(AP)

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