By Tetsushi Kajimoto and Yoshifumi Takemoto
TOKYO (Reuters) - A former economic adviser to Japanese Prime Minister Shinzo Abe said on Thursday that an increase in sales tax planned for October should be shelved until the economy puts a decisive end to deflation, or it could trigger an economic crisis.
"Now is not the time for a sales tax hike," Etsuro Honda, former Japanese ambassador to Switzerland who is close to Abe, told Reuters.
"The economy is not in a vicious cycle but it has not established a virtuous cycle (to defeat deflation) either. As such, I'm against the sales tax hike," he said.
Abe has repeatedly vowed to proceed with the planned sales tax hike to 10% in October, barring a big economic shock.
But speculation is persisting that Abe may again delay it at a time when "Abenomics" reflationary policy is sputtering.
Japan is expected to report a mild economic contraction in first quarter gross domestic product (GDP) as a global slowdown and the Sino-U.S. trade war take their toll on the country's export-led economy, a Reuters poll of analysts showed.
"We tend to worry about external factors, but if the tax hike goes ahead despite a fragile economy, that could trigger a 'Lehman shock' in Japan as domestic demand takes a hit," Honda said.
Honda said he has expressed his concerns to Abe. The premier listened to his views without showing approval or disapproval, he added.
The previous tax increase to 8% from 5% in April 2014 hit consumers hard and triggered a sharp slump in the world's third-largest economy.
Since then Abe has delayed the planned hike twice, in part due to suggestions from Honda and others concerned that it would trigger the same kind of slump caused by the first tax hike.
Abe has prioritised economic growth over fiscal reforms, despite the industrial world's heaviest public debt burden, which is more than twice the size of its $5 trillion economy.
Shelving the planned tax hike would cause a budget gap in funding Abe's promised spending plans such as making education free of charge. Honda said the government can issue deficit-covering bonds by taking advantage of super-low interest rates. The Bank of Japan should then ramp up government bond purchases under its quantitative easing programme, he said.
"What's necessary is more coordination between monetary and fiscal policies. The government can spend more by issuing more bonds. That will also help the BOJ, which will be given more government bonds to buy."
(Additional reporting by Leika Kihara; Editing by Jacqueline Wong)