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Tax Increase Unavoidable After Quake, Japan Lawmakers Say

A tax increase to finance earthquake reconstruction may be unavoidable considering the nation’s huge debt, two Japanese ruling party officials say, and two-thirds of the public agree the measure may be necessary.

“We can’t avoid raising taxes as the great earthquake may worsen an already dangerous fiscal situation,” Ikkou Nakatsuka, deputy chairman of the tax committee of the ruling Democratic Party of Japan, said in an interview last week. Separately, Vice Finance Minister Fumihiko Igarashi said today the government may scrap its plan to lower the corporate tax rate, a move the head of the nation’s largest business lobby said he would support.

A levy increase may help to push back the possibility of a future fiscal crisis with public debt already about twice the size of the $5 trillion economy. Some 67.5 percent of the public support higher taxes to fund reconstruction after Japan’s strongest quake on record, according to an opinion poll released yesterday by Kyodo News.

“Tax hikes would certainly be on the table considering Japan’s massive debt burden,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co.

The government estimates that rebuilding the northeastern area after the March 11 quake could cost as much as 25 trillion yen ($306 billion). The magnitude-9.0 temblor and an ensuing tsunami have left more than 27,000 people dead or missing.

Sales Tax Increase

Nakatsuka has suggested a two-percentage point increase in the sales tax rate, currently at 5 percent, to secure about 5 trillion yen a year.

“We may have the public’s understanding if it’s spent for quake reconstruction,” he said.

It would be the first increase in the sales levy since 1997, when it was raised to 5 percent from 3 percent. The economy fell into a recession after the increase and the Liberal Democratic Party, which was in control at the time, lost an election as a result. Mentioning a possible increase in the tax was one reason Prime Minister Naoto Kan’s DPJ lost control of the upper house in a national ballot last year.

‘Speedy Reconstruction’

Shinichiro Furumoto, a DPJ member and director-general of the party’s fiscal committee, said a sales tax would be the desirable option for raising reconstruction funds.

“Only the consumption tax imposes the burden equally among citizens, from young to old and from men to women,” he said in an interview last week.

To secure more funds, the government may forego a planned 5 percentage point reduction in the corporate tax rate, Igarashi told reporters today. The levy cut, which was supposed to begin in the year starting April 1, would have decreased tax revenue by between 1.4 trillion yen to 2.1 trillion yen, according to calculations by the Ministry of Finance.

The company tax rate in Tokyo is 40.69 percent, compared with 28 percent in the U.K. and 25 percent in China, according to the ministry’s data.

“If this will lead to a speedy reconstruction, personally it’s fine with me if the tax reduction is scrapped,” Hiromasa Yonekura, chairman of the business lobby Keidanren, told a news conference today.

The government will need to review its entire budgetary spending and revenue plans in examining how to fund reconstruction of the areas devastated by this month’s earthquake, Katsuya Okada, the No. 2 official of the DPJ said today.

Damage Demand

Some other lawmakers in both the ruling and opposition parties are against tax increases, saying such steps would damage private demand that’s already depressed in the aftermath of this month’s disaster.

“There’s no way that taxes can be increased when there’s deflation,” Kozo Yamamoto, a member of parliament with the opposition Liberal Democratic Party, said in an interview last week.

He instead called for a 20 trillion yen rebuilding program financed by Bank of Japan debt purchases. A group of ruling-party lawmakers submitted a similar proposal to Finance Minister Yoshihiko Noda this month, DPJ member Yoichi Kaneko said in a blog post.

The disaster may cause Japan’s gross domestic product to shrink by as much 12 percent on an annualized basis in the second quarter, Morgan Stanley MUFG Securities Co. predicted.

The LDP’s leader, Sadakazu Tanigaki, appears to disagree with Yamamoto’s views, as he said this month that he proposed to Kan a temporary tax to help fund the relief effort.

Noda has said the government has to gauge the impact of the disaster before considering how to fund rebuilding.

Moody’s Investors Service said after the quake that Japan may “at some point” reach a fiscal “tipping point” if investors lose confidence in the soundness of public finances and demand a risk premium on government bonds.

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