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Japan submits tax hike plan, heads into political showdown

Japan's Prime Minister Yoshihiko Noda speaks during a press conference at his official residence in Tokyo, Friday, March 30, 2012.

Shizuo Kambayashi/Shizuo Kambayashi/AP

Japan's government on Friday submitted laws to double its sales tax by 2015 to fund swelling social security costs in the world's fastest-aging nation, setting up a showdown that could split the ruling party, force early elections and deepen policy paralysis.

Prime Minister Yoshihiko Noda has staked his political career on the tax hike plan, but the chance of success looks slim as opposition parties in a divided parliament baulk at co-operating with the government.

Opposition to the tax hike also remains strong among the ruling Democrats, who this week spent long hours thrashing out minor changes to the legislation to win over dissenters.

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The government submitted the bills although Mr. Noda has yet to find a way to win backing from the opposition, which threatens to use its control of the upper house to block the bill to force an early election.

Members of the ruling party could also revolt and vote against the bill, which calls for the 5 per cent sales tax rate to be raised to 8 per cent in April 2014 and then to 10 per cent in October 2015.

"I want to create a society where people think tomorrow will be better than today... Removing people's worries about sustainability of the welfare system... is fundamental to that philosophy," Mr. Noda told a news conference.

"Merely submitting the bills is not enough. I will do my utmost for their enactment," he said, repeating he was determined to get the bills passed during the current parliament session that ends in June.

The International Monetary Fund and other organizations, rating agencies and many economists have repeatedly warned the clock was ticking for Japan, saddled with public debt twice the size of its $5-trillion economy and borrowing more than it raises in taxes.

The risk is that while Japan today can still satisfy all of its borrowing needs at home and at very low rates, delays caused by the political gridlock could push it to a point of no return.

"For the sales tax bill to become a reality, there is no other way than through the realignment of political parties," said Takero Doi, an economics professor at Keio University who has served on government panels on fiscal policy.

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"Noda needs to admit that despite the creation of the tax hike bill, the government is a half-step behind in drawing up social security reforms."

The Democrats could start adopting opposition parties' ideas on welfare reform to win their support, he added.

Japan spends half of its tax income just to service its debt. Each year it adds more than the combined gross domestic product of Greece and Portugal to its debt pile.

In a sign of the precarious state of Japan's public finances, new borrowing in the fiscal year starting in April is expected to exceed tax revenue for the fourth year in a row.

"The road ahead will be quite rocky," Finance Minister Jun Azumi said after a cabinet meeting.

Mr. Noda can take heart from the fact that his small coalition partner, the People's New Party that had opposed higher taxes backed down from threats to leave the government as doing so would leave the tiny party with less influence.

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But his greater concern is keeping his party together given that many Democrats fear voter backlash given the drubbings ruling parties suffered in past elections when even just the possibility of raising taxes was mentioned.

Under normal circumstances, an election does not need to take place until late 2013.

Japan, the world's oldest major society, expects two out of every five of its citizens to be 65 or older by 2060, reflecting low birth rates and long life expectancy, driving up welfare costs and shrinking the tax base.

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