Japanese Prime Minister Yoshihiko Noda’s ruling party completed its plan to double the nation’s consumption tax, clearing the way for the Cabinet to approve the legislation and submit it to parliament.
The Democratic Party of Japan decided early this morning on the bill’s wording, which states the levy could be halted in the event of “drastic” economic changes. The Cabinet is scheduled on March 30 to approve the measure, which would raise the sales levy to 8 percent in April 2014 and 10 percent in October 2015, DPJ tax-panel chief Shinichiro Furumoto told reporters Wednesday.
Submitting the legislation to parliament will force a battle with the opposition Liberal Democratic Party, which backed away from supporting a similar plan when it held power. While Noda said earlier this month he believes the parties can reach an agreement, LDP leader Sadakazu Tanigaki has suggested new elections should be called first.
“Given the development of political discussions, it’s getting increasingly unclear whether Noda’s government can conduct a vote for the sales tax bill during the current Diet session and pass it,” said Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc. in Tokyo. “The LDP, the largest opposition group, won’t likely cooperate on the bill easily.”
Failure to reach a compromise threatens to deepen gridlock as Japan struggles to recover from last year’s earthquake and nuclear disaster. The impasse could also push up bond yields, depriving the government of financing a record debt burden with the world’s second-lowest borrowing costs.
The DPJ bill agreed on this morning did not include specific economic-growth targets the government would have to meet before implementing the tax, which some lawmakers had called for. The government should “aim to achieve” an average of 2 percent growth in real terms and 3 percent nominal growth for the decade through the 2020 fiscal year, it said.
The final version eliminated previous wording that suggested additional increases beyond 10 percent would eventually be needed to finance the country’s swelling pension and social welfare costs.
Finance Minister Jun Azumi told reporters this morning the government is not “backing down” from its resolve to implement to tax because wording on additional increases was removed.
Japan’s benchmark 10-year yields were little changed at 1.005 percent at 9:27 a.m. in Tokyo, down from the three-month high of 1.06 percent reached March 15.
Former Bank of Japan Deputy Governor Kazumasa Iwata said in a Jan. 25 interview that if Noda fails, “it will have a very big impact on the market.”
The government may have a revenue shortfall of 50.8 trillion yen ($614 billion) in the fiscal year starting April 2015 without an increase in the sales tax, according to a finance ministry estimate published in January. Such a gap would contrast with the Noda administration’s pledge to limit new bond sales to about 44 trillion yen a year through fiscal 2014.
The LDP’s Tanigaki said on NHK Television March 2 that “it would be best” for Noda to seek a new mandate before submitting his tax legislation. He denied media reports that he and Noda met on Feb. 25 to discuss the situation.
The LDP’s own platform calls for raising the consumption tax and Tanigaki, a former finance minister, called for doubling the levy in 2006. Opposition lawmakers have criticized Noda’s inability to cut spending.
Japan’s parliament may pass a provisional budget for the next fiscal year on March 30, the Asahi newspaper reported, without saying where it got the information. Noda’s Cabinet is likely to approve the 3.6 trillion yen budget on March 28 or 29, the newspaper said.
Political squabbling may imperil Japan’s credit. Standard & Poor’s in November said it may be preparing to lower the sovereign rating given Noda’s lack of progress in tackling the debt issue. S&P rates Japan AA- and has had a negative outlook since April. (Bloomberg)
