Japanese Prime Minister Shinzo Abe is going ahead with a controversial sales tax hike to help reduce the country's massive public debt.
Abe on Tuesday announced the long-anticipated plan to raise the consumption tax from 5 percent to 8 percent by April of next year. "In order to maintain confidence in the country and pass sustainable social security to the next generation, I have decided to raise the tax of the central and local governments from 5 percent to 8 percent on April 1, 2014," he said.
The tax will raise an estimated $81 billion a year. It represents the first major effort since 1997 to reduce Japan's national debt, which at over $10 trillion is the largest in the industrial world.
Masamichi Adachi, a senior economist at J.P. Morgan in Tokyo, tells VOA he views the tax increase as a necessary initial part of addressing Japan's fiscal woes.
"This tax hike is definitely not enough to overcome the challenge that Japan faces with its huge government debt and deteriorating demographics in terms of aging population," Adachi explained. "However, this is a first step."
The move comes after a quarterly survey by the Bank of Japan showed business confidence rose to a five-year high, in what was seen as another crucial indicator that Japan's economy is recovering from years of stagnation.
Abe's economic strategy, known as Abenomics, has seen positive results since his December election. Stocks have surged and the economy posted the highest annualized growth rate among G7 nations in the first half of this year.
But some worry the new tax will hurt consumer demand and damage Japan's fragile growth. To offset those concerns, Abe announced a stimulus package that includes tax breaks for low-income earners and corporate incentives to boost wages.
More details of the stimulus package were expected to be unveiled later Tuesday. Tomohiko Taniguchi, an Abe advisor, declined to comment on the specifics of the stimulus during an interview with VOA.
"The aim is to smooth out the downside risks pertaining to the rise of the rate for the consumption tax, because Japanese deflation has been sticky for so many years and we're not so clear as yet that we have succeeded in getting rid of deflation," said Taniguchi.
The tax hike also represents a significant political risk for Mr. Abe. Two of his predecessors in recent decades were forced out of office shortly after raising the tax.
But Taniguchi said this time is different, partly because of recent positive economic indicators, and also due to Mr. Abe's strong performance in upper house elections in June. "Prime Minister Abe has amassed such a large amount of political capital. I think the amount is probably among the biggest for recent prime ministers in Japan, so he is pretty confident that he can carry out these [plans]," he stated.
Abenomics relies on boosting public spending in order to spur growth and aggressive monetary easing, or increasing the money supply, to help fight deflation.
But the third so-called "arrow" of Mr. Abe's plan involves structural reforms to Japan's economy that could prove to be painful and more politically difficult.