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Q+A: Japan's politically touchy debate on sales tax hike
June 21, 2010 / 3:25 AM / 7 years ago

Q+A: Japan's politically touchy debate on sales tax hike

TOKYO (Reuters) - Japanese Prime Minister Naoto Kan, who has made fiscal reform a top priority since taking office two weeks ago, wants to debate a future rise in the politically touchy consumption tax to curb the nation’s soaring public debt.

Kan’s call last week to discuss doubling the 5 percent sales tax was a major shift from his Democratic Party’s stance under his predecessor Yukio Hatoyama, who had vowed not to raise the tax for four years after taking power in 2009 with pledges to cut waste and give consumers more cash to boost demand.

Playing with the idea remains politically risky ahead of an upper house election on July 11, but Kan is betting that he could convince voters to tolerate the painful tax hike, given growing worries about massive debt and rising social welfare costs.

Here are some questions and answers on Japan’s consumption tax, which is one of the lowest among major economies.

WHY DID THE NEW PM BRING UP THE ISSUE NOW?

Kan’s willingness to broach the sensitive topic reflects the seriousness of Japan’s bulging public debt and the challenge of funding welfare and pension costs for a rapidly aging society.

Japan’s outstanding public debt is near 200 percent of GDP, the highest among advanced economies, keeping bond investors and voters wary as the government tries to balance the need for stimulating the fragile economy with a need for fiscal prudence.

“Debating the sales tax has long been seen as a political taboo. But for the Japanese people and for us politicians to achieve a strong economy and strong fiscal condition, we dared to mention this,” Kan told a news conference last week, where he stunned listeners by citing a possible rise to 10 percent.

HOW LIKELY IS THE CONSUMPTION TAX HIKE AND WHEN?

Kan said last week he would map out the size of a future sales tax hike by the end of the fiscal year to March 31, 2011, but has declined to say when the hike might be carried out.

The Democratic Party policy chief has said autumn 2012 was the earliest technically feasible date while the chief cabinet secretary said the government should first seek a mandate in a general election, which must be held by late 2013.

Economists have long said a hike was inevitable to help restore Japan’s tattered finances and fund growing social welfare costs in a rapidly aging society.

The government could raise some 2.5 trillion yen ($27.57 billion) annually by raising the tax by 1 percentage point.

HOW DID IT PLAY OUT IN THE PAST?

Japan last raised the rate to 5 percent from 3 percent in 1997, a move that was followed by a sharp economic downturn and a big election defeat for the ruling party.

But people may now be more willing to tolerate a rise because of worries about creaky pension and health care systems and the specter of a Greek debt tragedy.

A poll by Yomiuri newspaper showed on Monday that 48 percent of voters supported Kan’s remarks on possibly doubling the sales tax in the future, against 44 percent who did not.

Kan’s gamble may be less risky than precedent suggests. But voter support for his government, which had jumped right after he replaced Hatoyama, has slipped slightly with one public opinion survey showing an increase in opposition to the government among those who do not favor the sales tax hike.

Editing by Sugita Katyal

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