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     Jun 7, 2012

Noda future hangs on a tax thread
By Kosuke Takahashi

TOKYO - With Japan's economy remaining sluggish after two decades of prolonged deflation, Prime Minister Yoshihiko Noda is scrambling to pass bills to raise the consumption tax before the current parliament session ends on June 21.

While stressing in many occasions that "without a tax increase, Japan would go fiscally bankrupt like Greece", Noda has publicly vowed to stake his ''political life'' on the tax hike plan and now faces the possible end of his premiership. He is attempting to raise the consumption tax rate from the present 5% to 8% in April 2014 and to 10% in October 2015.

The nation is still struggling to recover from damages wrought by the triple disaster of a devastating mega-earthquake, tsunami and nuclear meltdown in March 2011 and the debate about the tax increase could sap still-fragile consumer spending and business confidence. That could send the nation into a vicious deflationary


spiral, in which falling prices and wages lead to rising unemployment.

The uncertainty created by the continuing global financial crisis is also casting a pall over the export-driven Japanese economy. Facing such heightened risks, Noda's rush to force through significant tax increases is questionable

"He has been subject to the mind control of the Ministry of Finance [MOF]," Toichiro Asada, a professor of macroeconomics at Chuo University in Tokyo, told Asia Times Online. "The MOF attempts to secure its vested interests through tax increases.

"The consumption tax hike amid a deflationary depression, however, would further shrink GDP [gross domestic product] and facilitate Japan dropping out of the club of economically developed nations," Asada said. "A wrong policy brings about disastrous outcomes."

Noda became prime minister last September after serving as a senior vice finance minister and finance minister for a total of two years. The MOF became his first ministerial portfolio, and he had been fully immersed in the ministry's policies, functions, ideas, guidelines and wishes.

The MOF, in return, catered to the wants and needs of a dutiful minister Noda, known as a fiscal hawk. It is said among the Japanese political cycles that the MOF unofficially supported Noda, rather than his rival Seiji Maehara, in the ruling Democratic Party of Japan's presidential election last September.

"The Noda administration is a puppet government of the MOF," political analyst Minoru Morita told Asia Times Online. "It's a stupid thing to raise the consumption tax at a time when the nation is in a deflationary situation and when people are worrying about a global depression."

Fiscal crisis of the state?
The MOF has announced that the accumulative long-term national and local debts of Japan will reach 196% of GDP by March 2013 (the end of Japan's fiscal year), the worst among developed countries. Moreover, Japan's reliance on debt in its initial budget for fiscal 2012 hit a new high of 49%.

Thus, the MOF is very reluctant to issue new government bonds and is keen to secure financial resources through an increase in the consumption tax to help cover the nation's swelling social security costs as the population ages and fewer babies are born.

Experts such as Asada have pointed out that the MOF is taking advantage of the Greek debt crisis and last year's triple disaster in eastern Japan, trumpeting that "for Japan, the euro-zone crisis is not a fire on the other side of the river" and that "restoration from the great earthquake disaster requires tax hikes".

But in fact, the MOF itself has admitted that economic crises overseas are totally different from the situation in Japan in the past. For example, in May 2002, Moody's downgraded Japan's long-term credit rating to A2. Around that time, the MOF made rebuttal statements against three rating agencies, namely, Moody's, Standard & Poor's, and Fitch.

It told them, "In the case of industrialized countries such as the US and Japan, defaulting on local-currency denominated debt is unimaginable. What kind of risk is exactly contemplated as 'default'?"

The MOF also pointed out that Japan has the largest savings surplus in the world, and that this surplus enables the nation to finance most of the debt domestically and stably at very low interest rates. In addition, the nation had the largest current account surplus, that it is the largest creditor country, and that it had the world's largest foreign exchange reserves.

Although China has since then past Japan as the world's largest holder of foreign exchange reserves, the rest of conditions remain. Currently, 94% of Japanese government bond is funded domestically at low interest rates.

"The MOF had done double-dealing," Asada said. "While prompting fears of a public-finance crisis domestically, it has denied the nation is in a financial crisis externally. This is a double standard."

A rapid increase in suicides again?
An increase in the consumption tax to 5% from 3% in 1997 may have been responsible for pushing many people to suicide. The following year, 1998, suicide rates in Japan jumped by 35% to 32,863 from 24,391 in the previous 12 months. Some experts say this increase was due to increased taxes, while others say it correlates with economic troubles and a rise in unemployment triggered by currency devaluations in Asia in the middle of 1997.

Many Japanese are still mired in a deep socioeconomic malaise in the wake of last year's natural and nuclear disasters. The number of suicides could jump again following a consumption tax hike in coming years.

Noda reshuffled his cabinet on June 4, sacking two ministers including the defense minister, whom opposition parties had demanded he replace. Noda was apparently seeking the cooperation of the main opposition Liberal Democratic Party in enacting a law for a consumption tax increase - the opposition bloc controls the House of Councillors, the upper house of parliament.

"Noda will fail to pass the sales tax hike-related bills in the current parliament session, and his administration will collapse sooner or later," political analyst Morita said. "Many politicians in both ruling and opposition parties hesitate to pass the tax legislation within this parliamentary session."

Noda's decision to push for a tax increase while the economy is so sluggish is bad timing, certainly in the eyes of voters. Only 17% of respondents to an Asahi Shumbun survey think bills related to a sales tax rise should be passed in the current parliament session, against 72% who said there is no need to pass the bills this session.

And if failure to pass the tax legislation leads to Noda's resignation, Japan's political chaos amid a familiar landscape will continue, according to Morita, not least the regularity with which Japan's prime ministers come and go from office.

"Whoever becomes the next prime minister, the next government will become a caretaker government until a general election," Morita said. "Japan's revolving door of prime ministers who keep resigning after very short tenures is likely to continue."

Kosuke Takahashi is a Tokyo-based Japanese journalist. His twitter is @TakahashiKosuke

(Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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