Noda Risks Party Rupture in Push to Pass Japan’s Sales Tax Bill

Japan's Prime Minister Yoshihiko Noda
Japan's Prime Minister Yoshihiko Noda. Photographer: Haruyoshi Yamaguchi/Bloomberg

Japanese Prime Minister Yoshihiko Noda’s attempt to craft a deal to raise the consumption tax risks rupturing his party three years after it ended half a century of one-party rule.

Noda has staked his political career on passing a law that would double the tax to 10 percent by 2015. The resurgence of ruling Democratic Party of Japan powerbroker Ichiro Ozawa, an opponent of the bill, threatens to thwart Noda’s efforts to reach a compromise with the main opposition Liberal Democratic Party that lawmakers from both sides say is possible.

“All Mr. Noda wants is to raise taxes, so he may go ahead and join up with the LDP,” said DPJ legislator Yuko Mori, a member of Ozawa’s group who resigned from her position as a vice minister over the bill. “That would be unacceptable and I would fight it with all my might.”

Failure to reach a deal could cripple efforts to fund soaring welfare costs and curb a rising debt burden that Fitch Ratings cited May 22 in cutting Japan’s sovereign rating. With voters upset over the pace of rebuilding from last year’s earthquake, an impasse could hurt both parties and open the way for a third force ahead of elections that must be held by August 2013.

“All the prime ministers who increased the consumption tax weren’t around three or four months after the tax increase went through,” said Jesper Koll, head of equity research at JPMorgan Chase & Co. in Tokyo. “Noda deserves some credit for putting his political career on the line.”

Fitch reduced Japan’s local-currency rating one level, citing the “political risk” of doubling the tax. The same day, the Organization for Economic Cooperation and Development said the country’s debt could exceed 220 percent of gross domestic product next year, and that raising the levy is a “top priority.”

Bond Yields

Concerns over the situation have yet to push government bond yields higher as Europe’s debt crisis lures investors to safe assets. Japan’s 10-year bond yields fell to 0.815 percent on May 18, the lowest in almost nine years. The rate traded at 0.870 percent late yesterday in Tokyo.

Ozawa, who was acquitted last month of violating campaign finance laws, and his followers say the bill contradicts the platform under which the party swept to power and could fail in its aim of increasing tax revenue if it prompts consumers to cut spending. As the No. 2 official in the DPJ, he engineered the party’s August 2009 ousting of the LDP from half a century of rule.

Voters are split on the consumption tax. About 50 percent oppose the plan, while 40 percent back it, according to a Nikkei newspaper poll published April 23. Noda’s popularity was at 27 percent, down from 67 percent in September when he became Japan’s sixth prime minister in five years. The newspaper surveyed 924 people and provided no margin of error.

Middle Ground

The DPJ dispute comes as LDP leader Sadakazu Tanigaki has signaled a willingness to find a middle ground. At the same time, he has questioned whether the prime minister can fend off a revolt in his own party.

“Is Mr. Noda going to put party unity first, give in to Ozawa and delay the bill because a vote would cause friction?” Tanigaki said May 9 on Fuji Television. “Or is he willing to risk a party split by facing up to this debate?”

Democratic Party lawmakers who favor the legislation say they could agree with some LDP proposals in order to pass it. What they won’t swallow is Tanigaki’s call for Noda to dissolve parliament in exchange for backing the tax increase, as a snap election would probably hurt both parties. The Nikkei poll put support for the LDP at 25 percent and for the Democrats at 23 percent.

“The Democrats must on no account call an election,” DPJ legislator Yukio Ubukata said in an interview. “We would lose half, or perhaps even two-thirds of our seats.”

Osaka’s Hashimoto

An election also raises the possibility of a third party taking seats from both the LDP and DPJ. Osaka Mayor Toru Hashimoto, who has led opposition to the government’s attempt to restart nuclear power plants in western Japan, is expanding his One Osaka party to gain national support.

“All existing political parties are on trial,” former DPJ Prime Minister Yukio Hatoyama said May 19 on TV Tokyo. “If there was an election now, I think it would be a massive victory for Hashimoto.”

The bill would raise the consumption tax from 5 percent to 8 percent in April 2014 and to 10 percent in October 2015. Noda is seeking a vote in the current parliamentary session, which is set to end June 21, though it could be extended.

Noda also faces another deadline when the DPJ in September meets to either re-elect him or choose another party leader. Senior DPJ lawmaker and former Finance Minister Hirohisa Fujii said a deal must get done regardless of Ozawa’s objections.

“If we don’t, Japan’s economic situation will not be stable,” Fujii said in an interview. “Funding social security with debt and more debt doesn’t make for security.”

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