Noda Woes Deepen in Japan as Tax, BOJ Plans See Opposition

Japanese Prime Minister Yoshihiko Noda
Yoshihiko Noda, Japan's prime minister. Photographer: Kenichiro Seki/Pool via Bloomberg

Japanese Prime Minister Yoshihiko Noda faced new challenges to his leadership as a member of the ruling group rejected his plan for a sales-tax boost and opposition widened to his nominee for the central bank board.

People’s New Party leader Shizuka Kamei told reporters today he would leave the coalition over legislation to double the consumption levy by 2015. At the same time, the head of the main opposition Liberal Democratic Party in the upper house said its members probably won’t support Ryutaro Kono for the Bank of Japan position.

The setbacks add to Noda’s struggles, with the Cabinet needing to draft the first stopgap funding bill in 14 years to keep the government running after parliament failed to adopt his 2012 budget. The LDP has called for early elections as Noda tries to become the Democratic Party of Japan’s longest-serving premier since the party took power in 2009, after his two predecessors didn’t last more than 14 months.

“It’s part of a broader problem as his ratings go down,” Robert Dujarric, director of the Institute of Contemporary Asian Studies at Temple University in Tokyo, said of today’s events. “It reflects paralysis on several levels.”

The LDP’s head of parliamentary affairs for the upper house, Masashi Waki, said in an interview today the group is unlikely to support BNP Paribas SA economist Kono for the BOJ. Noda must rely on opposition support in the upper house, where his ruling coalition lacks a majority.

Kono Rejection

The opposition New Komeito party will also probably reject Kono, lawmaker Otohiko Endo said in an interview, citing concern over Kono’s view on monetary policy. Yoshimi Watanabe, head of Your Party, told reporters he’ll reject Kono as well.

Noda acknowledged resistance to his policies in a nationally televised address today, saying that his political future hinges on the passage of the sales tax.

“Ruling and opposition parties will start discussing the tax bill,” Noda said. “This task is unavoidable for our nation and people, and we should not delay it further. We have to reach an agreement.”

Kamei’s rejection of the sales tax today revealed a split within the PNP as his deputy, Shozaburo Jimi, pledged support for the levy. Jimi told reporters that six of the party’s eight members backed that stance in a meeting yesterday.

Discord within the PNP, a junior coalition partner, adds to conflict within Noda’s DPJ. After the party completed the sales tax plan on March 28, 70 members signed a statement to protest ending discussions.

Noda’s Future

Noda’s political future will hinge on shifting alliances within the DPJ and the LDP, said Yasuo Yamamoto, a senior economist at Mizuho Research Institute.

“If LDP legislators who are supporting a sales tax increase leave their party and join the mainstream DPJ, then it’s easy to see the sales tax increase passing,” Yamamoto said. “If parliament reaches a stalemate the chance diminishes and there would be no other choice but for Noda to dissolve the Diet and call for an election.”

Noda, who in September became Japan’s sixth leader in five years, has an approval rating of 28 percent, down 4 percentage points from January, the Mainichi newspaper said this month.

An impasse has the potential to push up bond yields, raising borrowing costs as the government finances a record debt burden. Japan’s benchmark 10-year yield was little changed from yesterday at 0.985 percent at the close in Tokyo, down from a three-month high of 1.06 percent reached March 15.

Stocks Fall

Japanese stocks fell after a report showed the nation’s industrial production unexpectedly declined in February. The Nikkei 225 Stock Average slid 0.3 percent to 10,083.56, paring its monthly advance to 3.4 percent.

With the Cabinet approving the government’s sales tax legislation today, the proposal can now move to parliament, potentially initiating a battle with the LDP. Party leader Sadakazu Tanigaki has suggested new elections should be called to seek public approval before lawmakers move forward.

“It would be best” for Noda to seek a new mandate before submitting his tax legislation, Tanigaki said March 2 on NHK Television.

There is about a 60 percent chance that parliament will fail to approve the levy during the current session, which ends in June, said Yuichiro Nagai, an economist at Barclays Capital in Tokyo. Objection within the PNP itself doesn’t change those odds, he said.

Still, “a sales tax will be eventually raised because most of both ruling and opposition parties are acknowledging the need for Japan to increase the levy,” he said.

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