Japan leader set to announce sales tax hike

Shinzo Abe, Prime Minister of Japan speaks during the United Nations General Assembly at UN headquarters in New York, on September 26, 2013

Shinzo Abe, Prime Minister of Japan speaks during the United Nations General Assembly at UN headquarters in New York, on September 26, 2013  (Pool/AFP/File)

Japanese Prime Minister Shinzo Abe was expected Tuesday to announce a sales tax hike seen as crucial to cutting Tokyo's massive national debt, but that could derail a fledgling economic recovery.

The move marks a big political gamble for Abe -- previous hikes have proved career-ending for his predecessors -- with the 59-year-old leader likely to announce a stimulus spending package to help soften the blow.

Japan's premier was to hold a news conference later Tuesday, after the Bank of Japan issues its Tankan business confidence survey at 8:30 am local time (2330 GMT Monday) with household spending figures also due out.

Some expect the closely watched survey to hit a three-year high, possibly the tipping point that will give the premier the green light to implement a tax rise that was passed by the administration he booted out of office.

"This is Abe's biggest political decision since he took office," Tomoaki Iwai, a politics professor at Tokyo's Nihon University, told AFP.

"Japan is in the middle of an epic experiment and his decision is a crucial test of Abenomics."

Since sweeping December elections on a ticket to kickstart the world's third-largest economy, the prime minister has launched an unprecedented policy blitz -- dubbed Abenomics -- which appears to be taking hold as the economy expands and the stock market roars.

But his decision on hiking the tax levy, which is seen as crucial to chopping a debt mountain that is proportionately the worst among rich nations, threatens not only to sink Abe's growth plans but could also dim his popularity with voters.

Abe has officially been undecided for months on whether to go through with raising the levy to 8.0 percent from the current 5.0 percent, expected to come into force in April.

Tuesday's announcement will confirm if he will press on with the tax plan.

Economists estimate the impact on households at some 8.0 trillion yen ($81 billion), dealing a blow to consumer demand just as the economy is picking up.

To counter a downturn, Abe is expected to unveil a one-time $50-billion stimulus package with benefits for low-income earners and corporate incentives to boost investment and wages.

He may also speed up the timeline for getting rid of a special corporate levy ushered in after the 2011 quake-tsunami disaster.

Despite securing his power base in July upper house elections -- putting off elections for at least three years -- historical precedents are not good for premiers who force consumers to shell out more at the cash register.

Two of Abe's predecessors were forced to resign shortly after raising the tax in 1989 and 1997, which sent their public support tumbling followed by electoral defeats.