Japan's tax hike plan clears final hurdle, focus on polls

TOKYO Fri Aug 10, 2012 6:34am EDT

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TOKYO (Reuters) - Japan's contentious plan to double the sales tax cleared the final hurdle in a parliamentary vote on Friday after Prime Minister Yoshihiko Noda promised to bring forward an election likely to end his party's three-year rule.

The passage of the plan in the opposition-controlled upper house is a result of a rare political compromise and a breakthrough for Japan trapped for years in a cycle of revolving-door governments and policy paralysis.

"Politicians tend to delay or avoid policies that increase the burden on the public, but we have to do this to ensure that there is a sustainable source of funds for our welfare system," Noda told reporters.

"Europe's debt crisis shows the dramatic damage that a country can suffer once confidence is lost in public finances."

Noda was speaking as hundreds of demonstrators gathered outside his office for a weekly protest against his drive to restart reactors shut down after Fukushima disaster.

"Each party involved was determined to send a message to the world that Japan's politics is functioning, and that an effort is being made to steer clear of Japan's fiscal collapse," said Natsuo Yamaguchi who represented small opposition party New Komeito in 11th hour talks to save the tax plan.

But as the focus now shifts to the elections, analysts expect horse-trading over the exact timing of the polls to stall any further significant policy initiatives.

The plan to bring the tax to 10 percent by 2015 has been billed as a test of Japan's ability and resolve to tackle its snowballing debt that already tops two years' worth of its economic output, a record among industrialized nations.

It is also a victory for Noda, though a bittersweet one.

The former finance minister and the ruling Democrats' third leader in as many years made the tax plan his top goal and has worked relentlessly to achieve it, saying he was ready to sacrifice his political career if necessary.

With his offer to call an election "soon" he may have just done that given the Democrats' likely drubbing at the polls.

In its 2009 landslide victory the party rode a wave of public disillusionment with half a century of nearly non-stop rule by the rival Liberal Democratic Party (LDP). Now it faces a similar backlash over broken promises, the government's confused response to last year's tsunami and nuclear crisis and Noda's embrace of unpopular causes such as the tax hike or restarts of nuclear reactors.

A poll early this week showed only 13 percent of those surveyed said they would vote for the Democrats. But with support for their main rivals at 23 percent and nearly half of voters undecided some form of a wobbly coalition and more muddling through on policies and reforms is a likely outcome.

Keen to seize the momentum, the opposition is threatening no-confidence and censure motions if Noda drags his feet on the elections while trying to pass more bills, including one needed to sell new bonds to finance the budget deficit.

On Thursday, most opposition lawmakers skipped a vote on a no-confidence motion against Noda's cabinet filed by several fringe parties, allowing the Democrats to defeat it comfortably.

The lower house term runs through to August 2013 and some commentators said Noda might want to delay the polls until next year after he drafts the next budget.

That, however, may be impossible because of the opposition pressure.

"The prime minister should seek a mandate from the people as soon as possible ... 'Soon' can in no way be interpreted as 'sometime after the new year'," New Komeito's leader Yamaguchi told Reuters.

Since no party has majority in the upper house, a certain level of cross-party cooperation will be necessary regardless of the result of the lower house poll, although a grand coalition of major parties is unlikely, Yamaguchi said.

(Writing by Tetsushi Kajimoto and Tomasz Janowski, Editing by; Jonathan Thatcher)

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