Kan confronts taxing challenge
By Christopher Johnson
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."
Tokyo-based journalist Christopher Johnson, www.globalite.posterous.com,
is author of Siamese Dreams and an upcoming book on Japan.
(Copyright Christopher Johnson, all rights reserved.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
