A close adviser to Shinzo Abe has called for the Bank of Japan to take action “within one or two months” of next week’s increase in consumption tax, if data were to indicate that consumers were struggling to cope with the fiscal squeeze.

The comments from Yale University professor Koichi Hamada, one of the main architects of Abe’s economic revival programme, suggest that BoJ governor Haruhiko Kuroda may come under pressure from the government to present new easing measures if — as expected — momentum fades in the wake of the tax hike, the first in 17 years, which comes in to effect on April 1.

Economic growth in the world’s third-largest economy has already decelerated in recent quarters, Prof Hamada said in an interview with the Financial Times, thanks largely to sluggish exports and mounting fears of a post-hike slowdown.

“If statistics such as spending data show weakness after the tax increase, then the BoJ should act quickly to implement more powerful monetary policy,” said Prof Hamada.

Monetary policy

Kuroda’s first act on assuming the governorship of the BoJ in April 2013 was to unleash a new phase of monetary policy, dubbed “quantitative and qualitative easing” (QQE), under which he pledged to hit a 2 per cent target for inflation within about two years, by buying enough longer-term government bonds to double base money. Since then he has kept that basic framework in place, while promising to supply further stimulus should demand falter after the increase in consumption tax, from 5 per cent to 8 per cent.

However, in recent months the BoJ has said it expects to see inflation level off at around 1.25 per cent until the summer, causing observers to push back expectations for a further shot of easing. Some anticipate that the BoJ will hold off until September, the first meeting after publication of preliminary GDP data for the April-June period, or October when it is due to update its growth and inflation forecasts.

Private-sector economists expect gross domestic product to contract by an annualised 3.7 per cent between April and June, following a turbocharged 4.1 per cent growth in the first quarter.

Delaying until autumn could be unwise, said Prof Hamada, given that Japan is approaching the tax hike having achieved just 0.7 per cent growth in the fourth quarter of 2013 — roughly equal to the economy’s potential growth rate.

“To have actual growth at about Japan’s potential growth rate means that the output gap will not be narrowed,” he said, alluding to estimates of spare capacity within the economy. “That [0.7 per cent rate] is already much weaker than we’d like.”

The Abe government has set aside a 5.5 trillion Yen fiscal spending package — more than the extra 4.5 trillion Yen it expects to collect in the next fiscal year in consumption taxes — to offset the impact of the increase.

Further easing could come in the form of more buying of government bonds and other assets including exchange traded funds, said Prof Hamada, 78, provided such actions did not upset markets too much.

“I always think stronger medicine has stronger side-effects, so the BoJ, like all central banks, should try and calculate the risks. But even if bigger buying of bonds or other assets disturbs or interferes in private activities, the central bank should do it, if it really has to.”