Kan's Election Loss May Delay Japan's Sales Tax Debate, Dai-Ichi Life Says

Election losses by the party of Japanese Prime Minister Naoto Kan over the weekend may delay a debate on whether to raise the sales tax to address the nation’s budget shortfall, according to Dai-Ichi Life Research Institute.

The ruling Democratic Party of Japan lost its upper-house majority, winning 44 seats compared with 51 for the opposition Liberal Democratic Party, according to public broadcaster NHK. Your Party, a new group founded by former LDP cabinet minister Yoshimi Watanabe, won 10. Half of the 242 seats were being contested in the less powerful of Japan’s two houses of parliament.

Opposition control of the upper house will likely last until the DPJ’s leadership election in September, said Hideo Kumano, the Tokyo-based chief economist at the research unit of Japan’s second-largest insurer. The political turmoil may “stall a debate on fiscal reform, including raising the sales tax,” he said.

In the wake of the European debt crisis, Kan was able to gain voters’ understanding for his call for a debate on whether to raise the 5 percent tax, Kumano said. Still, “Prime Minister Kan’s wavering on how to use revenue from the tax invited voters’ skepticism over his pledge to cut spending,” he said.

The government should raise the levy by 2 percentage points in fiscal 2015 after the next general election, followed by a 3- percentage point increase several years later, Kumano said.

Kan, who took office on June 8, released a fiscal plan on June 22 that said annual spending will be capped at 71 trillion yen ($797 billion) over the next three years along with a series of tax reforms. The strategy also calls for balancing the budget by the year ending March 2021. New bond sales will be kept within the current period’s 44.3 trillion yen next fiscal year and beyond, the plan said.

To contact the reporter on this story: Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net.

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