TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe is expected to announce on Wednesday that the government will delay a scheduled sales tax hike by two-and-a-half years, but will likely bow to pressure from his coalition partner not to call a snap general election.
The tax delay, which had been widely expected, will be welcomed by voters, who will cast ballots in an upper house election in July. But it is fanning doubts about Abe's plans to curb Japan's huge public debt and fund ballooning social welfare costs of a fast-ageing population.
It would be the second time that Abe has delayed the increase in the sales tax to 10 percent from 8 percent, after a rise from 5 percent in April 2014 tipped the economy back into recession. Abe took office in December 2012 pledging to beat deflation and reboot the moribund economy with his "Abenomics" revival recipe, but has made little headway amid stubbornly weak domestic and export demand.
"From an economic standpoint, the market is likely to view the delay as a positive surprise for domestic demand," said Lee Jin Yang, macro research analyst for Aberdeen Asset Management in Singapore.
Abe, whose term as ruling Liberal Democratic Party president and hence, premier, ends in September 2018 unless the LDP changes its rules, has repeatedly said he would implement the tax rise as planned unless the economy faced a shock from a financial crisis or natural disaster.
But he laid the groundwork for a delay at last week's Group of Seven summit, insisting his G7 partners shared a "strong sense of crisis" about the global economic outlook and drawing parallels to the 2008 world financial crisis that followed the bankruptcy of Lehman Brothers.
Government officials have said Abe has not abandoned a pledge to bring the country's primary budget balance into the black by the fiscal year from April 2020 to rein in public debt which is already more than double annual economic output.
But that target had already looked elusive, even with the government's rosy forecast of real economic growth of 2 percent on average in coming years.
Abe will also need to explain to voters how he plans to make up for the funding gap from the tax hike delay to October 2019, and keep pledges to beef up support for the elderly.
Speculation had simmered that Abe would call an election for parliament's powerful lower house as he did in 2014 after announcing the first tax hike delay, aiming to lock in his ruling bloc's two-thirds "super majority" in the lower house and win a similar grip on the upper chamber.
No lower house poll need be held until 2018.
(Reporting by Linda Sieg, Tetsushi Kajimoto and Leika Kihara in Tokyo, Masayuki Kitano in Singapore; Editing by Kim Coghill)