Japan Ratifies First Sales-Tax Increase Since 1997 in Noda Win

Japanese Prime Minister Yoshihiko Noda won parliamentary approval for his bill to raise the country’s sales tax for the first time in 15 years, a move that split his ruling party and weakened its election prospects.

The opposition-controlled upper house yesterday ratified legislation to double the five percent tax by 2015 after Noda this week reaffirmed a deal with two opposition parties, pledging in return to call elections “soon.” The lower house passed the bill in June, causing more than 50 ruling Democratic Party of Japan legislators to leave.

“It is important to take the opportunity to start to improve the fiscal situation,” Noda said at a televised press conference in Tokyo. “I want the people to understand this.”

Noda made raising the levy the center of his legislative agenda, saying it was essential to rein in Japan’s record debt and pay for soaring welfare costs even as public opposition mounted. The main opposition Liberal Democratic Party is seeking early elections to capitalize on the falling popularity of the prime minister, Japan’s sixth leader in as many years.

“Getting this controversial bill, a major legislative accomplishment, through a hung parliament should burnish Noda’s credentials,” said Jeff Kingston, head of Asian studies at the Tokyo campus of Temple University in Philadelphia. “Still, he has lots of problems and one of them is he doesn’t appear to listen to popular opinion.”

Photographer: Tatsuyuki Tayam/Pool via Bloomberg

Prime Minister Yoshihiko Noda said at a televised press conference in Tokyo, “It is important to take the opportunity to start to improve the fiscal situation.” Close

Prime Minister Yoshihiko Noda said at a televised press conference in Tokyo, “It is... Read More

Close
Open
Photographer: Tatsuyuki Tayam/Pool via Bloomberg

Prime Minister Yoshihiko Noda said at a televised press conference in Tokyo, “It is important to take the opportunity to start to improve the fiscal situation.”

The bill raises the tax to 8 percent in April 2014 and to 10 percent in 2015, and a clause allows for implementation to be canceled based on an assessment of economic conditions. The last sales tax increase in 1997 contributed to pushing the economy into a 20-month recession, costing then-premier Ryutaro Hashimoto his job.

Yields Fall

Yields on Japanese government bonds yesterday fell half a basis point to 0.795 percent today after rising to a one-month high of 0.81 percent on Aug. 7 on concerns the bill might fail.

Even with the sales tax increase, the government said in January that it will probably miss its goal of achieving a primary balance surplus, which excludes debt servicing costs, by fiscal 2020. It forecast a primary deficit of between 1.9 percent and 3.1 percent of gross domestic product in that year, compared with the fiscal 2011 deficit of 7.4 percent.

“A sales tax rate of 10 percent is nothing close to sufficient,” said Takahira Ogawa, a Singapore-based director of sovereign ratings at Standard and Poor’s. S&P downgraded Japan’s credit rating to the fourth-highest grade of AA- in January 2011, and cut the outlook to “negative” three months later.

The International Monetary Fund and the Organization for Economic Cooperation and Development have both urged Japan to be more aggressive in tackling a debt that the OECD predicts will reach 223 percent of GDP next year.

Tanigaki Failure

LDP leader Sadakazu Tanigaki failed in an attempt this week to force Noda to specify a date for an early general election in exchange for support of the tax bill. Noda, who faces re- election as the head of his party of Sept. 21, agreed only that he would call an election “soon,” which analysts including Kingston said is unlikely until December. Elections must be called by August 2013.

While Noda has fallen in opinion polls over the bill and opposition to the re-starting of nuclear plants following last last year’s Fukushima disaster, the LDP has failed to increase voter enthusiasm for its policies.

In a survey published in the Asahi newspaper on Aug. 6, Noda’s support rate fell to 22 percent from 25 percent the previous month, which is the lowest since he took power in September last year. Support for the DPJ and the LDP was tied at 13 percent.

About 48 percent of respondents said they opposed the sales tax bill, while 42 percent said they supported it. The Asahi surveyed 1,540 people on Aug. 4-5 and provided no margin of error.

“Voters are going to have to hold their nose and vote for what seems to be the least bad option,” Kingston said.

To contact the reporters on this story: Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net; Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net

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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.