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Japan: Rising Chance of Sales Tax Hike?
• Support within the government for a
consumption tax hike has been increasing.
• Many in the government seem to be coming
around to the idea that it cannot come up with a
credible plan for social security reform unless it
starts talking about raising consumption tax.
• Meanwhile, public opinion on the tax is
changing, with more people now opposing
Hatayama’s “no hike” stance than supporting it.
• The conventional wisdom that the
consumption tax is a taboo at election time
might not hold this time around.
Support within the government for a tax hike
Lately there seems to be growing support within the
government for a consumption tax hike. Although
Prime Minister Hatoyama himself has not abandoned
his opposition to raising the tax anytime during the
current four-year term of the Lower House (which
expires in the summer of 2013), successive cabinet
ministers, beginning with National Policy Minister
Sengoku, have been voicing support for a tax hike
ever since Finance Minister Kan announced in
February that discussions on this issue would begin
at an early date. Indeed, in a move apparently laying
the groundwork for a future tax hike, Finance Minister
Kan on 26 April convened the Fiscal System Council
for the first time in roughly 15 months, and named as
its new chairman Tokyo University Professor Hiroshi
Yoshikawa. The latter is a proponent of raising the
consumption to secure a permanent source of
funding for social security. Even so, there are doubts
that the government will actually produce concrete
plans for raising the consumption tax prior to the
Upper House election slated for July.
Credibility for social welfare reform ahead of
election
That the government is taking up this issue at this
juncture reflects more than just renewed concerns
about Japan’s deteriorating fiscal condition, sparked
by the Greek sovereign crisis, or the economy’s
improved prospects now that the risk of a soft patch
or worse has faded. The government is becoming
increasingly aware that raising the consumption tax
is inevitable, if it is to reform the country’s social
security system. The DPJ rode into power last year
by continually hammering the LDP-led governments
over the past decade on issues related to Japan’s
floundering pension system, from problems with the
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60
40
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Chart 1: General Account Expenditures and
Revenue (JPY trn)
Public bond issuance (% of GDP, RHS)
Expenditures
Tax revenue
0
65 70 75 80 85 90 95 00 05 10
Source: MOF, BNP Paribas
Notes: Figures through FY 2008 based on end-of-year financial
statements, FY 2009 includes second supplementary budget, FY 2010 is
government's initial budget.
Chart 2: Public Opinion on Hatoyama's "No Tax
Hike" Stance (%)
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50
40
30
20
10
0
Jan.Survey Feb. Survey Mar.Survey Apr. Survey
2010
Source: Nikkei Shimubun, TV Tokyo, BNP Paribas
Oppose
Approve
Don't know
Social Insurance Agency itself (scandals, misuse of
funds etc) to problems with “lost pension records”
and “pension premium delinquency” of some LDP
officials (some DPJ lawmakers were delinquent too,
but guilty parties in the LDP included several cabinet
ministers). In other words, pension system reform
was one of the key pledges that helped the DPJ win
power. However, unless the party is prepared to talk
about a consumption tax hike, it cannot come up with
a credible reform plan ahead of the Upper House
election (which is shaping up to be an uphill battle for
the DPJ).
Pre-election talk of sales tax used to be taboo
As pointed out in earlier reports, Japan is structurally
prone to running budget deficits because it tries to
maintain “mid-level social welfare” with only “lowlevel
burden-sharing.” The current social welfare
systems (healthcare, pensions) were established in
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10
8
6
4
2
Ryutaro Kono/ Hiroshi Shiraishi 7 May 2010
Market Mover
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