Abe likely to proceed with tax hike

TOKYO: Japanese Prime Minister Shinzo Abe will likely proceed with raising the national sales tax hike as planned, despite calls within his government to delay or water down the increase, a senior official in Abe's ruling party told Reuters on Wednesday.

Abe has shown no signs that he would change the tax hike plans to accommodate advisers who are urging him to go slow, as that could wreck confidence in the country and push up long-term interest rates, Takeshi Noda, head of the Liberal Democratic Party's tax commission, told Reuters.

The planned sales tax hike is Tokyo's most significant fiscal reform in decades, but the recent debate over alternatives has raised the possibility that Abe might postpone the tightening or ease the tempo of the two-stage plan to double the tax to 10% in two years.

Concerned that the tax hike could derail Japan's nascent economic recovery, Abe has ordered a study of alternatives for implementing the tax increases, including introducing them more gradually, government sources have told Reuters.

But Noda in an interview dismissed the alternatives – championed by academic advisers to the premier – as "armchair theory".

Asked if the sales tax would be raised as planned, he said in an interview: "Of course."

Noda, who recently met with the premier, said Abe gave no impression that he was wavering on the tax plan.

"Confidence in Japan would fall, and government bond yields would be affected" if Tokyo gives the impression that it is faltering on the tax issue, Noda said. "That could be fatal."

"The biggest risk to Abenomics is a spike in interest rates," Noda said.

Abe returned to power in December pledging to revive the world's third-largest economy with his policy mix of aggressive fiscal and monetary stimulus and promises of pro-growth reforms.

With Japan's public debt topping 240% of its GDP, the worst in the industrial world, the prime minister is struggling to balance reviving economic growth against bringing public finances under control.

Under an agreement last year between the LDP, its coalition partner and the previous ruling party, Japan enacted a law calling for the sales tax to be raised to 8% next April and to 10% in October 2015.

But the law requires the government to confirm that the economy is strong enough to withstand the tax increase. Government officials say Abe will look at economic data, especially GDP figures due on Sept 9, and decide on the tax by early October.

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US economy likely lost step in second quarter; expected to regain pace - Reuters

The U.S. flag waves in the breeze above one of the entrances to the New York Stock Exchange, November 19, 2012.

Credit: Reuters/Chip East

By Lucia Mutikani

WASHINGTON | Wed Jul 31, 2013 4:29am EDT

WASHINGTON (Reuters) - U.S. economic growth likely slowed sharply in the second quarter, but it is poised to regain momentum as the burden brought on by belt-tightening in Washington eases.

Gross domestic product probably grew at a 1.0 percent annual rate, a step back from the first-quarter's 1.8 percent pace, according to a Reuters survey of economists. Some said growth could be even weaker, with forecasts ranging as low as 0.4 percent.

Tighter fiscal policy, a slow pace of inventory accumulation and sluggish global demand, which has dampened exports, are seen as having hobbled the economy in the April-June period.

"The economy only had a couple of legs to stand on, consumers and housing, but conditions are falling into place for a stronger second half of the year," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania.

The Commerce Department will release the second-quarter GDP report at 8:30 a.m. EDT on Wednesday.

If economists' forecasts are proved right, it would mark a third straight quarter of GDP growth below 2 percent, a pace that normally would be too soft to bring down unemployment.

But given the backward-looking nature of the GDP report, it is not likely to have any impact on monetary policy.

Federal Reserve officials, wrestling with a decision on the future of their $85 billion per month bond-buying program, will probably nod to the second quarter's weakness when they wind-up a two-day meeting on Wednesday. But they are also expected to chalk up much of the weakness to temporary factors, such as the drag from fiscal policy and a smaller build-up of business inventories.

Fed Chairman Ben Bernanke said last month that the central bank was likely to start curtailing the bond purchases later this year and would probably bring them to a complete halt by the middle of 2014, if the economy progressed as expected.

"Even with a relatively soft GDP number, the Fed still appears confident in their outlook and the prospects of the labor market going forward," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. "It looks like they are positioned to make their announcement, come late this year."

SILVER LINING IN REVISIONS?

While U.S. financial markets have already priced in a weak second-quarter GDP reading, comprehensive revisions to the data might present a silver lining for the economy.

The government has implemented some changes in how it calculates GDP. For example, research and development spending will now be treated as investment, and defined benefit pension plans will be measured on an accrual basis, rather than as cash.

Economists say these changes will not only reveal a bigger economy and a higher rate of saving, but they could lead to an upward revision of 2012 growth as well.

"There's a distinct possibility that real GDP growth over the past four quarters will be upgraded," said Maury Harris, chief economist at UBS in New York.

"In addition, history suggests that the originally published personal saving rate will be revised up, which would calm some concerns about under-saving consumers holding back their upcoming expenditures."

Economists said the revisions would probably narrow the gap between a relatively strong pace of job gains and weak growth, a misalignment they said the Fed was monitoring.

Higher taxes, as Washington tries to shrink the government's budget deficit, likely constrained consumer spending in the second quarter, keeping the economy on an anemic growth pace.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to have slowed to a less than 2 percent pace after rising at a 2.6 percent rate in the first quarter.

That could bring the contribution from consumer spending far below the 1.8 percentage points it added in the first quarter.

With domestic demand tepid, businesses likely tried to keep their inventories from bulging. Inventory accumulation is expected to have made only a modest contribution to growth.

Other details of the report are expected to show exports weighed on the economy as demand weakened in Europe and China. Trade is expected to have subtracted more than half-a-percentage point from GDP growth in the second quarter.

Good news is expected from the housing sector, with double-digit growth forecast for spending on residential construction. Housing, which triggered the 2007-09 recession, is growing strongly, helping to keep the economic recovery anchored.

Business spending on equipment and software likely continued a steady march upward, with investment in nonresidential structures rebounding from a decline in the first quarter.

Government spending, however, is expected to have contracted for a third straight quarter, largely because of the across-the-board spending cuts in Washington.

(Reporting by Lucia Mutikani; Editing by Dan Grebler)

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