ECONOMY: A taxing problem for Japan

http://www.atimes.com/atimes/Japan/LF23Dh01.html

TOKYO – If you’re shopping in Tokyo for a new television to watch the football World Cup, would you still buy it if the sales tax was doubled to 10%, as many politicians want? Or how about 20%, as some Finance Ministry officials suggest, or 22%, as the International Monetary Fund advised last month, in order to pay down the swelling government debt? 

Amid growing calls for tax hikes, many citizens and economists in Japan are worrying that the introduction of new taxes, which has snuffed out economic recoveries in the past, could scare away consumers and erode the popularity of new Prime Minister Naoto Kan. “It seems to me to be unwise to be raising taxes when there is still so much excess capacity in the economy, interest rates are already at zero, and the exchange rate is strong,” Richard Jerram, an economist at Macquarie Capital Securities in Tokyo, told Asia Times Online. “Japan does not face the same constraints as Greece, which suffers from being locked into the euro.” 

A Kyodo news survey over the weekend found that a third of about 400 candidates running for the July 11 Upper House elections favor doubling the consumption tax to 10%, and the former long-time ruling party, the Liberal Democratic Party, vows to make it its policy. But only a third of the current rulers, the Democratic Party of Japan, said they supported the tax hike, while another third didn’t respond to the survey. 

While this suggests that party members are divided over tax hikes, Kan, who became premier on June 8, devoted most of his first speech in the Diet (parliament) to worrying about the country’s debt, which is more than twice annual gross domestic product, the highest-rated among industrialized nations. “We cannot sustain public finance that overly relies on issuing bonds,” Kan told the Diet. “As we can see in the euro zone confusion that started from Greece, there is a risk of default if the growing public debt is neglected and if trust is lost in the bond market.” 

Kan proposed setting up a panel to discuss fiscal reform “beyond the boundaries of ruling and opposition parties”, and some of his party members reportedly want their election manifesto to include pledges to raise the tax. On Monday, however, Kan indicated the government would not raise the sales tax “for at least two to three years”. Bloomberg news quoted government financial adviser Toshiki Tomita as saying that Kan may have to raise taxes by as much as 7 trillion yen (US$76 billion) to fulfill pledges to cap bond sales and limit public spending. 

Yet many politicians will recall that the T-word has cursed leaders and the economy in the past. Noboru Takeshita had to resign as prime minister not long after introducing the shohizei 3% consumption tax in 1989, which some say burst Japan’s asset bubble. In 1994, prime minister Morihiro Hosokawa announced at a midnight press conference that he was going to hike the tax to 7% – but he dropped the plan the next day amid a backlash and was ousted a few months later. In 1997, premier Ryutaro Hashimoto finally pushed the sales tax to 5% , but many critics blamed it for snuffing out a recovery. 

Since then, a distrustful public has balked at any government attempt to take more money from them, in light of corruption scandals and the mishandling of millions of pension records. During the 2005 election campaign, then-prime minister Junichiro Koizumi told an interviewer that the election was an “inappropriate time” to talk about tax hikes, which he reportedly favored as part of his efforts to stream the fat off Japan’s bloated public and corporate sectors. Koizumi resigned soon after winning the election, and proposals for tax hikes have been dead in the water, at least until resurfacing in the past few months. 

With little training in economics, Kan, 63, at first appeared more interested in slashing wasteful government programs than raising taxes. But after becoming finance minister in January this year, his tone changed, reflecting the opinions of finance ministers of other indebted nations and economists hired by his own party, which came to power for the first time last September. 

Yoshiyasu Ono, 59, an economics professor at Osaka University who has been advising the cabinet on economic matters since February, is known to favor raising taxes and spending the money on creating jobs in the environment and health sectors, which are potential growth areas in a greying society. His theory is that people with jobs are more likely to spend and consume, even if their taxes are higher. Ono has also called for levying an environment tax and then using the funds to subsidize lower price tags for energy-efficient products, in a scheme similar to the existing Eco-point program in Japan. 

Yet many longtime Japan observers say the government has better options. Financial adviser and commentator Andrew Smithers suggests that the government should aim to boost revenue by taxing corporations, not consumers. “Japan has the additional problem of over-investing and under-consuming, which it needs to rectify.” He says that if corporations invest less and sell more, they could put up larger profits and pay more taxes. “It follows from these points that Japan should be slow in raising taxes and that when it does raise them it should not raise consumption tax,” he told Asia Times Online in an e-mail. “The sensible thing to do is unorthodox and thus unlikely. This is to put a tax on investment rather than on consumption.” 

Smithers says that if budget deficits worldwide are slashed too quickly they could cause another global recession, which in turn would lead to increased government spending and rising debt. He says deficits should be brought down slowly, and in a way that eases imbalances in the world economy. “This means that countries with current account surpluses, such as Germany and Japan, should be slow to reduce their deficits, while those with current account deficits, such as the UK and US, should aim to bring down their deficits relatively quickly and, if the impact is too negative on growth, take additional steps to ease monetary policy.” 


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