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Noda’s Tax-Boost Plan Stalls in Danger to Japan Bond Yields

Japanese Prime Minister Yoshihiko Noda
Yoshihiko Noda, Japan's prime minister. Photographer: Haruyoshi Yamaguchi/Bloomberg

Japanese Prime Minister Yoshihiko Noda says doubling the consumption tax is a necessary remedy to address soaring debt and social welfare costs. His opponents don’t disagree; they’re just not going to let him do it.

The main opposition Liberal Democratic Party has rejected repeated calls to negotiate on the proposal and instead demanded new elections, as polls show 60 percent of voters oppose the levy and Noda’s popularity plunging. LDP lawmaker Ichita Yamamoto in an interview said “raising the consumption tax is impossible” under Noda’s watch.

Failure to reach a compromise threatens to deepen the stagnation underscored by six prime ministers since 2006 and an economy struggling to recover from last year’s earthquake and nuclear disasters. The impasse could also push up bond yields, depriving the government of financing a record debt burden with the world’s second-lowest borrowing costs.

“If Noda fails, it will have a very big impact on the market,” former Bank of Japan Deputy Governor Kazumasa Iwata said in a Jan. 25 interview.

Iwata said the possibility of an “unusual shock” can’t be ruled out, comparing the risks to the bond market with two episodes when shifts in sentiment caused yields to spike. Between October 1998 and February 1999, and again between June and September 2003, yields on 10-year bonds more than tripled.

Yields Fall

The prospect of escalating borrowing needs has yet to hit Japan’s securities, with the yield on the benchmark 10-year government bond dropping one basis point, or 0.01 percentage point, to 0.965 percent at 10:30 a.m. in Tokyo.

The government may have a revenue shortfall of 50.8 trillion yen ($656 billion) in the fiscal year starting April 2015 without an increase in the sales tax, according to a finance ministry report obtained by Bloomberg News. Such a gap would contrast with the Noda administration’s pledge to limit new bond sales to about 44 trillion yen a year through fiscal 2014.

Noda on Jan. 24 renewed his call for dialogue on the Democratic Party of Japan’s plan to raise the sales tax to 8 percent in April 2014 and 10 percent in October 2015. A Cabinet Office report the same day said the government will probably miss its goal of balancing the budget by 2020 even if the plan passes, and officials have said further increases are likely.

Rising Discontent

A Mainichi newspaper survey published Jan. 23 said the proportion of the public opposed to the increase rose to 60 percent from 54 percent in December. Noda’s approval rating fell to 32 percent from 38 percent, and is down 24 percentage points since he became the DPJ’s third leader since 2009, when it ousted the LDP from half a century of control.

LDP leader Sadakazu Tanigaki has said Noda’s party reneged on pledges to cut spending and overhaul the pension system, and should call new elections. His legislators say that, while public discontent over the deadlock may hurt their party as well, defeating the DPJ takes precedence. The Mainichi poll put ruling party support at 17 percent and the LDP’s at 16 percent.

“Many people hate us, and this is serious,” Yamamoto said. “The point is there won’t be a breakthrough if the current situation continues.”

LDP lawmaker Takeshi Noda, who isn’t related to the prime minister, says ruling party dissension undercuts the government. Nine DPJ legislators opposed to raising the consumption tax left to form their own party and other members have expressed reservations.

‘Split in Two’

“The ruling party is split in two,” said Noda, who is head of the LDP’s tax panel. “It’s wrong to ask for opposition support before he unites his own party. The bill won’t pass the lower house.”

At the same time, the LDP’s own platform calls for raising the consumption tax and Tanigaki, a former finance minister, called for doubling the levy in 2006. Opposition lawmakers have criticized Prime Minister Noda’s inability to cut spending. The DPJ has yet to come up with the 16.8 trillion yen ($216 billion) in revenue it pledged to find by reducing “wasteful” outlays.

Social-security expenses, which have more than doubled in the past two decades, will account for 52 percent of general spending in the fiscal year beginning April 1.

“The LDP also proposes raising the consumption tax to 10 percent, so the number is fine,” Liberal Democratic legislator and former Credit Suisse First Boston economist Yukari Sato said in an interview. “But the government plan lacks specifics in cutting social security expenses. An election should be held to break through the current sense of frustration.”

Election Dispute

Deputy premier Katsuya Okada, whom Noda appointed this month to lead the tax increase effort, has repeatedly rejected the notion of going to the voters before the legislation passes.

“Decisions have to be made,” Okada said Jan. 22 on Fuji Television. “There’s no time for an election.” Two days ago Okada said that even a 10 percent increase in the sales tax “will be insufficient” to sustain the pension fund system in the world’s most rapidly aging society.

Political squabbling may imperil Japan’s credit. Standard & Poor’s in November said it may be preparing to lower the sovereign rating given Noda’s lack of progress in tackling the debt issue. S&P rates Japan AA- and has had a negative outlook since April.

Japan’s politicians “have to look around the world, especially at the European debt crisis,” said Masaaki Kanno, chief economist in Tokyo at JPMorgan Securities Japan Co. and a former Bank of Japan official. “We don’t have time to waste.”

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