Bold indecision

Japan: Japan’s funding plan has taken one step forward, and two steps back. The country’s new government is considering raising taxes by 11.2 trillion yen ($146 billion) and selling stakes in big companies like Japan Tobacco (JT) to help pay for rebuilding areas destroyed by the March earthquake and tsunami. That’s welcome. What’s worrisome is that the proposals seem to retreat from the earlier recognition that raising consumption taxes is the way to go. Given the political hurdles ahead, Japan can’t afford to keep re-opening old debates.

The fact that Prime Minister Yoshihiko Noda is considering the sale of government shareholdings is a vindication for The Children’s Investment Fund, the activist hedge fund. TCI has been agitating for the government to either improve JT’s desultory returns or sell down its 50 per cent stake, which is worth about $22 billion. That would help finance the roughly $247 billion the government plans to spend on reconstruction. But given the brief lifespan of Japanese governments, amending the law that requires JT to be majority government-owned is a long shot. Noda not only has to contend with an opposition-controlled upper house, but with rival factions in his own party.

The same goes for tax increases. Raising income taxes hits Japan’s shrinking working-age population, while the country’s corporate tax rates are already among the world’s highest. But its 5 per cent consumption tax is among the lowest. Société Générale estimated earlier this year that a 10-percentage-point increase in income taxes would yield only 1.2 trillion yen in additional revenue, while raising the sales tax by one percentage point would pull in up to 2.5 trillion yen. And consumers typically accelerate spending in advance of a sales tax increase, providing an extra jolt to the recovery.

Noda’s predecessor had proposed doubling the consumption tax to 10 per cent. But the new plan appears to reopen the debate about changing income, corporate and even excise taxes. Japan is running out of time for dithering: The global economy is slowing and exports with it. If Japan is going to get the most from its reconstruction spending, it needs to come up with a plan and stick with it.