Japan Abe set to delay sales tax hike by one-three years - sources

By Takaya Yamaguchi and Leika Kihara

TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe will postpone a sales tax hike planned for next year, perhaps by as much as three years, government sources say, a move he will justify as part of G7 efforts to avert another global financial crisis.

While the tax hike was seen as critical to reining in Japan's massive public debt, Abe and his aides have signalled the chance of deferring it as Japan's economy skirts recession and a threat of deflation re-emerges ahead of summer upper house elections.

"We've reached a global agreement to cooperate to avoid another big crisis from erupting ... As G7 chair, Japan will spearhead such moves to contribute to the global economy using all policy tools available," Abe told reporters after the Group of Seven (G7) leaders' summit in western Japan on Friday.

"We must reignite powerfully the engine of Abenomics. That undoubtedly would include a decision on what to do with the sales tax hike," he said, offering his strongest hint yet that next year's tax hike will be delayed.

Abe said that a decision, which he is yet to reach, will be announced before the upper house elections expected in July. But government sources told Reuters the premier will reach a decision early next week after consulting with his ruling party's junior coalition partner.

Abe is likely to delay the tax hike, originally scheduled in April 2017, by one to three years, three sources with direct knowledge of the matter told Reuters on Friday. Such a delay will still allow Japan to narrowly meet its target of turning its budget deficit into a surplus by fiscal 2020, they said.

G7 A COVER FOR TAX DELAY

During the Ise-Shima G7 summit, Abe has been playing up what he calls parallels to the global financial crisis as growth in Japan sputters.

While such pessimism was dismissed by some countries like Germany, Abe was attempting to have the G7 paint a dismal view of the global economy to justify delaying the tax hike or deploying a big domestic spending package, some analysts say.

"We have strengthened the resilience of our economies in order to avoid falling into another crisis and, to this end, commit to reinforce our efforts to address the current economic situation by taking all appropriate policy responses in a timely manner," the G7 agreed after a two-day summit on Friday.

Abe postponed the tax hike to 10 percent by 18 months after the first increase to 8 percent in April 2014 tipped Japan into recession. Since then, he has said the tax hike will not be delayed unless there was a massive natural disaster or a crisis on the scale of the 2008 collapse of Lehman Brothers.

"Abe's portrayal of the global economy as being one step away from a crisis is excessive, but delaying the tax hike would certainly remove a negative from Japan's economy," said Norio Miyagawa, senior economist at Mizuho Securities.

"As long as he doesn't shelve the plan indefinitely, Abe can still reasonably claim he hasn't given up on fiscal discipline."

Japan narrowly averted recession in the first quarter of this year and many analysts expect it to barely grow in the current quarter as weak emerging market demand weighs on exports and tame wage growth hits household spending.

A recent Reuters poll added to the gloom, showing a strong majority of Japanese firms surveyed now expect no escape from deflation for the foreseeable future.

The Asahi newspaper reported that Abe would also forgo calling a snap election of the lower house of parliament, instead focusing on the upper house election already scheduled in July.

There had been some speculation Abe would call a lower house election to coincide with the upper house election.

(Additional reporting by Stanley White; Editing by Richard Pullin & Shri Navaratnam)