Japan Faces Tax Battle as DPJ Finishes Plan on Sales Levy

Japanese Prime Minister Yoshihiko Noda’s ruling party completed its plan to double the nation’s consumption tax, clearing the way for the Cabinet to approve the legislation and submit it to parliament.

The Democratic Party of Japan decided early today on wording that says the levy could be halted in the event of “drastic” changes to the country’s economic outlook. The Cabinet is scheduled on March 30 to approve the measure to raise the sales levy to 8 percent in April 2014 and 10 percent in October 2015, DPJ tax-panel chief Shinichiro Furumoto told reporters.

Submitting the legislation to parliament may force a battle with the opposition Liberal Democratic Party, which supported a similar plan when it held power until 2009. While Noda said earlier this month he believes the parties can reach an agreement, LDP leader Sadakazu Tanigaki has suggested new elections should be called first.

“Given the development of political discussions, it’s getting increasingly unclear whether Noda’s government can conduct a vote for the sales tax bill during the current Diet session and pass it,” said Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc. in Tokyo. “The LDP, the largest opposition group, won’t likely cooperate on the bill easily.”

Growth Targets

The DPJ bill agreed on this morning did not include specific economic-growth targets the government would have to meet before implementing the tax, which some lawmakers had called for. The government should “aim to achieve” an average of 2 percent growth in real terms and 3 percent nominal growth for the decade through the 2020 fiscal year, it said.

The final version eliminated previous wording that suggested additional increases beyond 10 percent would eventually be needed to finance the country’s swelling pension and social welfare costs.

Finance Minister Jun Azumi told reporters this morning the government is not “backing down” from its resolve to raise the tax because wording on future increases was removed.

Failure to reach a compromise threatens to deepen gridlock as Japan struggles to recover from last year’s earthquake and nuclear disaster. 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.

Yields Fall

Japan’s benchmark 10-year yields fell 1 basis point from yesterday to 1.000 percent at 3:30 p.m. in Tokyo, down from a three-month high of 1.06 percent reached March 15. A basis point is 0.01 percentage point.

The DPJ push on the bill has deepened a rift within the ruling party, with 70 members signing a statement last night to protest ending discussions, tax opponent and DPJ member Shozo Azuma told reporters.

“Unfortunately, our discussions were cut off suddenly,” DPJ lawmaker Hiroshi Kawauchi said after the meeting.

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

Political squabbling may also imperil Japan’s credit. The stable outlook on Japan’s Aa3 rating from Moody’s Investors Service is predicated on the consumption tax increase “being at least partially implemented before 2015,” Thomas Byrne, who is responsible for the ratings of Japan and other major Asian economies, said at a press conference in Tokyo last month.

Rating Outlook

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.

The government may have a revenue shortfall of 50.8 trillion yen ($614 billion) in the fiscal year starting April 2015 without an increase in the sales tax, according to a finance ministry estimate published in January. 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.

Japan’s parliament may pass a provisional budget for the next fiscal year on March 30, the Asahi newspaper reported, without saying where it got the information. Noda’s Cabinet is likely to approve the 3.6 trillion yen budget on March 28 or 29, the newspaper said.

The LDP’s Tanigaki said on NHK Television March 2 that “it would be best” for Noda to seek a new mandate before submitting his tax legislation. He denied media reports that he and Noda met on Feb. 25 to discuss the situation.

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 Noda’s inability to cut spending.

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