Loophole could thwart Japan sales-tax rise

Japanese prime minister Yoshihiko Noda won a major victory in finally securing the passage of a hard-fought tax-increase package last week, but analysts argue that a provision in the law to consider economic conditions before implementation means the battle to achieve the tax increase isn’t yet over.

The law to raise the national consumption tax to 10 percent from the current 5 percent in two stages by 2015 was passed Friday after a dramatic week of political brinkmanship that forced Noda to promise general elections “in the near term” in return for opposition support for the legislation.

The provision in the law says the government should consider the overall economic situation before implementing the increase and calls for policies to achieve annual average economic growth of about 3 percent in nominal terms, or about 2 percent in real terms, by fiscal 2020. But these figures are a stretch for a deflation-hobbled Japan that hasn’t seen such growth rates since the early 1990s.

Once at the full 10 percent rate, the tax is expected to generate an extra JPY 13.5 trillion ($172 billion) annually, which could help stem the country’s mounting debt pile, now at nearly JPY 1 quadrillion and equal to more than 200 percent of annual gross domestic product. Outside analysts and ratings agencies have stressed that a tax increase is a vital first step in repairing Japan’s finances, but insist that more is necessary, including measures to boost GDP.

The growth figures in the provision were included at the behest of tax opponents, who fear that higher consumption tax rates will drag on the economy. Critics have blamed the last tax increase in 1997 for wiping out the nation’s fragile post-bubble economic recovery and triggering deflation, which continues to plague the economy 15 years later.

“The GDP goal is something they are trying to achieve over a long period of time. But under current conditions, [achieving that goal] looks pretty hard,” says Mari Iwashita, strategist at SMBC Nikko Securities.

Five leading economic research firms surveyed by The Wall Street Journal predicted an average of 0.97 percent real growth and 0.77 percent nominal growth in the 10-year period. From 2001-2010, average real GDP growth was 0.75 percent, but nominal GDP has been almost stagnant since the early 1990s amid sustained deflation.

As part of its overall drive to spur the economy, the Cabinet approved a plan last month to help jump-start growth and achieve the 3 percent nominal and 2 percent real growth rates by fiscal 2020. The Japan Revitalisation Strategy includes working with the Bank of Japan to erase deflation and promoting growth in environmental, medical and tourism markets to create more than 4.8 million new jobs by 2020. But the plan is vague on how these measures will actually achieve these targets.

Still, even if the government fails to elevate growth rates to the levels set out by the tax-increase law provision, the linkage between the tax and the state of the economy in the provision is ambiguous. The provision says that before implementing the higher levy, the government will “give holistic consideration to the economy and will take appropriate measures, which could include halting [the tax's] enactment” if economic conditions are languishing. The section specifies that the GDP-boosting measures will also be taken into consideration.

Some proponents of the tax hike say the government therefore has considerable leeway in acting.

Hirohisa Fujii, the ruling Democratic Party of Japan’s tax chief and a former finance minister, said in a recent interview that economic-growth targets shouldn’t be a prerequisite for enacting the tax rise and that it “should take place barring the unlikely event of the economy shrinking by more than 3 percent.”

In addition, stipulations in the law make it more difficult to stop the higher tax rate from kicking in. According to the Ministry of Finance, such a step would require passage of a new measure that would have to be voted through parliament like a regular law. Therefore, if political deadlock were still continuing at the time of each hike, the higher tax rate would automatically go into effect.

But analysts say it is difficult to predict today what the mood will be next year.

“Before we talk about macroeconomic conditions, we still need to talk about the political condition,” said Standard & Poor’s sovereign rating director for Japan, Takahira Ogawa. “If the government is reluctant or negative on the increase in the sales tax [at the time of its planned implementation], even if the macroeconomic conditions are relatively healthy, they might defer or they might not carry out it.”

Yoichi Takahashi, an economic adviser to former prime minister Junichiro Koizumi and a former minister of Finance bureaucrat, agreed that politicians will interpret the ambiguous clauses as they please.

Takahashi stressed that economic growth is the key factor in making a difference to Japan’s fiscal situation, citing the need for more easing by the Bank of Japan, a weakening of the yen and the strengthening of exports, not the raising of the tax rate.

“The sales tax will not lead to financial consolidation,” Takahasi said. “The government isn’t even thinking seriously about financial reform.”

Correction

Former Ministry of Finance official Yoichi Takahashi said Japan needs to strengthen exports. An earlier version of this article incorrectly said he referred to imports.

http://online.wsj.com/article/SB10000872396390444318104577588662660200348.html

 

Category: Japan