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Abe Opts For Sales Tax-Hike; Stimulus Planned To Soften Impact On Economy

Japan PrimeMinister Shinzo Abe 100113

Japan's Prime Minister Shinzo Abe said Tuesday that he will hike the sales tax as planned from April next year to reduce the country's huge debt load. The government is also set to announce a stimulus package to cushion the potential negative impact that the tax hike could have on the nascent recovery of the economy.

The government will increase the consumption tax to 8 percent from April 2014 from the current 5 percent, Abe said at the beginning of a meeting with the ruling coalition. The tax hike is the first such move since 1997.

An official announcement on the sale tax decision and the planned stimulus package is expected later today. Abe will endorse a planned second-stage hike to 10 percent in October 2015 once the first-stage increase proves to be effective.

At around 230 percent of gross domestic product, Japan's has the largest debt pile among advanced economies.

Since assuming power in December last year, Abe has brought in radical policy overhaul, often dubbed Abenomics, to get the economy out of its deflation trap, that has been a drag on the nation's growth for the past 15 years.

Recent indicators have suggested that Abenomics is having a positive impact. Abenomics proposes a "three arrow" strategy comprising monetary policy, fiscal stimulus and structural reforms.

Inflation in the country has accelerated to the fastest since 2008 in August, official data showed last week, adding to signs that the government is gradually gaining ground in its battle against deflation. Japan's gross domestic product grew at an annualized pace of 3.8 percent in the June quarter, according to revised estimates released by the government last month.

The results of the Bank of Japan's Tankan survey released earlier today showed that the index measuring sentiment among large manufacturers rose to its highest reading since 2007.

"Ending deflation is my administration's top priority," Abe was quoted as saying earlier today. "We have to strike a balance between economic recovery and fiscal discipline," he said.

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