TOKYO (Reuters) - Japan's Prime Minister Shinzo Abe should delay indefinitely a planned increase in a sales tax, or even cut the levy, given its potential impact on flagging private consumption, a prominent Abe adviser said on Wednesday.
Etsuro Honda, special adviser to the Cabinet and a key architect of Abe's reflationary economic policy, also told Reuters in an interview that an extra budget of up to 7 trillion yen ($62.32 billion) should be compiled to stimulate consumption.
His suggestion to cut the sales tax is the first among leading officials in Japan's policy circles.
"The prime minister seems to understand my concern about the risk (to consumption) from a consumption-tax hike," Honda said, while refraining from predicting what the premier will decide.
With recovery sputtering after more than three years of pro-growth 'Abenomics', and national elections looming in the summer, Abe must decide whether to proceed with plans to raise the tax to 10 percent from 8 percent in April 2017 - the second of a two-step increase meant to shore up Japan's finances and pay for social spending in a fast-ageing society.
"The sales tax shouldn't be raised until deflation is beaten completely. We must not take steps that run counter to Abenomics," Honda said, referring to the planned tax hike.
"Lowering the tax rate to 7 percent would be a strong message to the world and consumers that Japan is serious about stimulating consumption."
Abe on Wednesday suggested the possibility of postponing the tax hike, which would be his second delay, saying any decision to go ahead would be "political".
Honda has previously said the tax increase should be delayed, but his stronger comments on Wednesday add to a growing debate about whether Abe will boost spending, delay the tax hike, or both.
Honda was among those who persuaded Abe to put off the tax hike, initially planned for October 2015, after a first increase in April 2014, from 5 percent, tipped the world’s third-biggest economy into deep recession.
"The economy is in a bad shape and the chance of another delay in the tax hike is rising. I would not be surprised if a tax cut is put on the table given Honda's influence," said Masaki Kuwahara, senior economist at Nomura Securities.
Opposing a delay are the Finance Ministry, some fiscal hawks in Abe’s party and some economists who worry that failing to curb runaway public debt - which, at more than twice GDP, is the industrial world’s heaviest debt burden - could threaten credit ratings downgrades and other disruptions.
Abe has long said he would only delay the hike again if Japan were to suffer a shock on the magnitude of the 2008 collapse of U.S. investment bank Lehman Brothers, which ushered in the global financial crisis.
More recently, though, he said a global economic contraction could also force a re-think, and it would be meaningless to press ahead if it crimped tax revenue by choking the economy.
His government has begun informally game-planning a tax-hike delay while laying the groundwork for further fiscal stimulus.
Reporting by Tetsushi Kajimoto, with additonal reporting by Yoshifumi Takemoto; Editing by William Mallard and Ian Geoghegan