Japan’s Tax Reform: Too Little, Too Late
Japan has the biggest debt burden (more than 200% of GDP) of any mainstream economy, which, combined with its heavy budget deficits and ageing population, suggests that a fiscal crisis is a real possibility over the coming years. Granted, some people have been predicting a Japanese debt crisis since the late 1990s and this has not yet transpired. However, the fact that something has not yet happened despite repeated predictions does not mean that it never will.
Mindful of Japan’s growing fiscal risks, the government is finally swinging into action. The House of Representatives this week passed bills to reform social security and tax legislation, paving the way for a series of changes which includes the controversial increase in consumption tax from 5% to 8% in April 2014 and to 10% in October 2015. An increase in consumption tax has been discussed for years, but political leaders have thus far been too timid to take the plunge, fearing a loss of popular support.
Prime Minister Yoshihiko Noda is taking a huge gamble here, and he deserves credit for staking his career to improve Japan’s public finances. The last time the consumption tax was raised, from 3% to 5% in 1997, the economy subsequently went into a deep recession (although the Asian financial crisis was another contributing factor), forcing the then-prime minister, Ryutaro Hashimoto, to resign after his party suffered losses in the 1998 Upper House elections.
Noda’s move could backfire in two ways. Firstly, it could hurt Japan’s economy at a time when it is already facing headwinds from the eurozone crisis, China’s slowdown, and US weakness. Secondly, more than 50 legislators in the ruling Democratic Party of Japan, led by the veteran powerbroker Ichiro Ozawa, voted against the tax increase, and may conceivably leave the party. If they were to leave or be expelled, the DPJ could lose its majority in the House of Representatives. The result could be an early election (which is not due until August 2013). Yet, with both the DPJ and opposition Liberal Democratic Party (LDP) looking weak in polls, the consequence could be a hung parliament. However, herein lies hope for change, for this could offer an entry point to national politics for a new regional party emerging from Osaka, driven by the city’s reform-minded mayor, Toru Hashimoto. Ultimately, this could transform Japanese politics, paving the way for economic change too.
A more in-depth analysis of Japan’s consumption tax, fiscal dynamics, and political outlook is available to subscribers at Business Monitor Online.