Japan PM seeks tax reform as budget battle looms

Japan’s prime minister, facing a divided parliament and doubts over his political survival, on Monday stepped up his campaign for a sales tax rise he argues is vital to pay for huge welfare costs in the fast-aging society.

Prime Minister Naoto Kan’s key economic ministers, also speaking to the opening session of parliament, promised on their part to impose fiscal discipline, as the government presses ahead with a proposed budget from April with record spending of 92.4 trillion yen ($1 trillion).

Kan has made social security and tax reform his policy priorities and warned in his speech that he would have to ask the public to “bear the burden” to secure stable funding — a reference to a future hike in the 5 percent sales tax.

His government is grappling with a public debt that is the largest among advanced nations, double the size of the $5 trillion economy.

It also wants to avoid damaging a fragile recovery that stalled at the end of last year while China breezed past Japan to take the global number two spot in GDP.

But even the 2011/12 budget is far from secure. To pass bills needed to implement it, Kan must either cobble together a simple majority in the upper house with opposition help or build a two-thirds majority in the lower house to override the upper chamber.

“Limits are emerging to the securing of greater revenues for social security under only existing efforts,” he said in a speech at the start of the regular parliament session.

“Every single lawmaker, in both the ruling and opposition parties, is responsible for responding to this major issue.”

Japan’s consumption tax rate is among the lowest in major economies, but successive governments have put off tackling the issue, fearful a rise would anger voters.

Kan said the cabinet would also present basic outlines for tax and welfare reform by June. Analysts said it was not certain Kan would be in office that long if opposition parties refused to budge on their position.


“Crunch time will come in March or April,” said Sophia University professor Koichi Nakano, noting the possibility that Kan might resign or call a snap election if budget bills stalled.

Opposition parties are being combative, making the prospect for talks on tax and social welfare reform appear dim.

“To force a snap election as soon as possible — that is our goal,” said Sadakazu Tanigaki, head of the biggest opposition Liberal Democratic Party (LDP).

Finance Minister Yoshihiko Noda sought to reassure markets about fiscal policy by vowing to pursue a prudent approach to debt issuance and to maintain a close dialogue with financial market participants.

While other developed countries are tackling massive public debt built up during the global financial crisis, Japan’s debt has been growing for years as it tried to revive the economy after a massive property bubble burst in the early 1990s.

New debt issuance will exceed tax revenues for a second year in a row under the budget the government approved last month.

Although the government can enact the budget because the ruling DPJ controls the powerful lower house, it needs support from the opposition, which controls the upper chamber, to pass legislation to implement spending.

Tanigaki of the LDP, which some polls show is now more popular than the ruling party, told Reuters last week his party would have a hard time agreeing to those bills unless the DPJ abandons costly campaign pledges such as special allowances for families with children.

The No. 2 opposition group, the New Komeito, said it was undecided. Its support would be enough to pass the bills through the upper house.

Economics Minister Kaoru Yosano, a former LDP heavyweight drafted by Kan in a cabinet reshuffle this month to bolster his tax reform push, urged the central bank to do its bit to fight deflation. Japan has been in mild deflation since 2000.

“I hope the BOJ will maintain close communication and cooperation with the government and continue supporting the economy through appropriate and flexible monetary policy, in order to overcome deflation early,” he said.

But the 72-year-old Yosano, who has harshly criticized DPJ spending policies as fiscally irresponsible, has come under fire from the opposition and some in the ruling party for his shifting political loyalties.