TOKYO, Feb 19 (Reuters) - Two-thirds of Japanese firms are concerned about the government's fiscal discipline, a Reuters survey showed on Thursday, as Prime Minister Sanae Takaichi plans a temporary suspension of sales tax on food and steps up investment to spur growth.
Takaichi late last month called a snap general election with a vow to suspend an 8% food levy for two years, shaking market confidence in the country's fiscal health and sending long-dated Japanese government bonds (JGB) yields to record highs.
Following her party's historic election victory on February 8, however, Takaichi pledged to pursue "responsible" stimulus and not to issue fresh debt to pay for the tax cut, helping JGB yields to tread lower.
About 11% of respondents are greatly concerned about the Takaichi government's fiscal discipline, while 55% are somewhat concerned and 30% are little worried, the survey showed.
The International Monetary Fund said on Wednesday while limiting the tax cut to essential goods and ensuring it is temporary would help contain government costs, Japan needs fiscal restraint to help keep bond markets stable.
Asked about potential developments that worry them, 64% of those that were greatly or somewhat concerned about the government's fiscal discipline picked a weaker yen pushing up the import costs of raw materials and 55% were worried about higher borrowing costs. The question allowed multiple answers.
Reviewing capital investment plans and fund-raising methods as well as curbing pay hikes are among the steps firms are considering taking if such worries materialise, the survey showed.
"We support (Takaichi's) proactive fiscal policy, but we want them to proceed with it while keeping in mind the burden future generations will shoulder," a manager at an information services company wrote in the survey.
Japan, a country with an ageing and shrinking population, is labouring under the developed-world's highest debt burden.
The poll was conducted by Nikkei Research for Reuters from February 3 through 13. Nikkei Research reached out to 492 companies of which 217 responded on condition of anonymity.
CHINA TENSIONS
The survey also showed Japanese companies were now less worried about the potential impact of diplomatic tensions between Tokyo and Beijing than a month ago, although ties remained strained.
Takaichi touched off a diplomatic clash with China when she said in November that a Chinese attack on democratically governed Taiwan could constitute a "survival-threatening situation", a legal term that allows the deployment of the country's Self-Defense Forces.
China has subsequently urged its citizens not to travel to Japan. It has also banned exports to Japan of dual-use items that have both civilian and military applications, including certain rare-earth elements vital to making drones and chips.
About 18% of respondents said they expected the issue to affect their business, down from 35% in the previous survey in January.
The ratio of respondents that anticipate little impact was 73% in the latest poll, up from 57% in January.
Some respondents said China remained an important market for them despite the dispute, while others said they were distancing themselves from Chinese business.
"As long as something like this happens periodically, we cannot see China as an attractive market, a stable production base or a procurement source," an official at a rubber products maker said. "We will be moving towards doing without China."
Tensions flared up in 2012 when the Japanese government nationalised a group of disputed East China Sea islets, triggering anti-Japan protests and boycotts of Japanese products across China.
(Reporting by Kiyoshi Takenaka; Editing by Lincoln Feast.)
By Kiyoshi Takenaka
