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Japan MOF Kan: Tax Hike Could Beat Deflation If Spent Right

TOKYO (MNI) - Japanese Deputy Prime Minister and Finance Minister Naoto Kan on Monday said a tax hike could actually help the country beat deflation if a resulting higher tax revenue is spent on creating jobs, which in turn should boost spending.

He also told the Foreign Correspondents' Club of Japan during a question and answer session that it is up to the forex markets to decide whether the current depreciation of the yen by about Y10 to the dollar since the Dubai shock late last year is good. But he also said Japanese firms (ie. exporters) appear to find the development "quite favorable."

Kan declined direct comment on the weekend agreement among Eurozone countries to make up to E30 billion in contingency loans available to debt-laden Greece this year and its impact on the yen exchange rates, but simply said he was confident that Europe can overcome the Greek financial crisis.

Kan reaffirmed that the government has "no particular request" for the Bank of Japan's JGB buying operation because it has been buying government debt from markets steadily and there has also been demand from financial institutions to buy Japanese government bonds.

The minister has been careful about policy coordination between the government and the central bank, calling on the BOJ to continue fighting deflation in general terms and leaving the specifics up to decisions by the BOJ policy board.

He declined comment on where long-term interest rates should be.

Kan repeated that he would prefer to see Japan's annual inflation rate a little higher than the BOJ's "understanding" that in the long term the year-on-year change in the consumer price index should settle somewhere above zero and below 2%.

In his speech, Kan said the biggest reason why Japan has been mired in stagnation and deflation in the past 20 years is that "money is not circulating" since the asset bubble of the late 1980s was burst.

"We have to ask the public to share a tax burden and allocate tax revenue so we can spend on creating jobs, which in turn should boost incomes and then lead to a higher tax revenue," he said. "Tax revenue won't be spent on just paying down the public debt."

Later in response to questions, Kan warned that deflation poses a threat to both sustained economic growth and fiscal consolidation.

He said he understood that the BOJ's thinking is that credit easing has some impact on overcoming deflation but that it has its own limitations as an effective policy tool.

"Within the government, we agree that in order to close the (negative) output gap, some fiscal spending is needed, but there is no consensus as to whether it should be financed solely by issuing government bonds or also using tax reform," he said.

Kan urged both the ruling coalition and opposition parties to engage in the debate on whether to raise taxes for Japan's future in parliament even before the Upper House elections expected to be called sometime this summer.

"A tax hike could actually help us overcome deflation if you spend (the higher tax revenue) in the right way... if it helps circulate money," he said, adding that he had instructed his staff to look into this issue.

Jitters about the sustainability of public pensions and medicine have led some in the younger generation to save instead of spend. In order to quell this concern, MOF officials argue that Japan must raise the 5% consumption (sales) tax to secure a stable source of revenue.

tokyo@marketnews.com ** Market News International Tokyo Newsroom: 81-3-5403-4833 **

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