Japan to Double Sales Tax by 2015 as Noda Fights Off Ruling Party Revolt

Japan’s ruling party agreed on a plan to double the sales tax by 2015 after weeks of internal debate and a member revolt as Prime Minister Yoshihiko Noda fights to head off another credit-rating downgrade.

The proposal would raise the sales tax from 5 percent to 8 percent in April 2014 and to 10 percent in October 2015. A panel headed by Finance Minister Jun Azumi approved the measures today, clearing them for discussion with an opposition led by the Liberal Democratic Party, which has already hinted at its disapproval.

“It will be very tough,” Jun Okumura, a former Japanese trade ministry official and a consultant at the Eurasia Group risk consulting firm in Tokyo, said today by telephone. “The bill may not pass parliament as the LDP may oppose the Democratic Party of Japan bill for political reasons.”

Noda is staking his job on raising the sales tax, a stance that already contributed to his predecessor’s resignation. Standard & Poor’s said last month it was considering lowering the country’s sovereign rating, already cut in January to AA-, as Noda’s government makes little progress tackling the country’s debt burden.

The DPJ wants to submit the sales tax bill to parliament by March, policy chief Seiji Maehara told reporters today, adding that economic conditions would be assessed before raising the levy.

Low Growth

With an aging population and two decades of low growth fueling the world’s largest public debt, the burden is projected to exceed 1 quadrillion yen ($13 trillion) in the current fiscal year. Still, Noda faces dissent within his own party as he pushes to raise the sales tax, with at least nine members citing the party’s failure to keep campaign promises as their reasons for resigning two days ago.

After the defection, LDP leader Sadakazu Tanigaki said Noda should call an election.

“The DPJ promised not to raise the sales tax and they’re going to raise it,” Tanigaki told reporters on Dec. 28. “Noda is staking his job on this, so he should call an election to ask the public.”

Noda’s approval rating dropped to 31 percent from 40 percent last month, according to an Asahi newspaper telephone survey of 1,655 voters taken Dec. 10-11. The same survey showed the public divided on doubling the sales tax by 2015, with 45 percent in favor and 45 percent opposed. Asahi didn’t give a margin of error.

“Unless we send a message that we’ll maintain social security and fiscal discipline, we could find ourselves in a crisis,” Noda told party members yesterday.

Tax Pledges

Japan introduced a sales tax in 1989 and raised it to 5 percent in 1997, a decision blamed for pushing the nation into a 20-month recession that caused then Prime Minister Ryutaro Hashimoto’s LDP to lose a majority in the lower house of parliament for the first time.

When the DPJ took power in 2009, former Prime Minister Yukio Hatoyama pledged not to alter the 5 percent tax during the current lower house term, which ends in August 2013. Naoto Kan, who followed Hatoyama as premier, began pushing for a debate on raising the sales tax while he was still finance minister.

While Kan cited his response to the March earthquake and tsunami for stepping down, his support within the party waned after it lost an upper house election in July 2010 as he signaled he aimed to raise the consumption levy.

“Prime Minister Noda will work on implementing the plan no matter what happens,” Yoshikiyo Shimamine, chief economist at Dai-Ichi Life Research Institute in Tokyo, said by telephone. “As long as Japan maintains the stance to raise taxes, the risk of a downgrade will be eased to some degree for now.”

To contact the reporter on this story: Sachiko Sakamaki in Tokyo at ssakamaki1@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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