Japan To Hike Consumption Tax Despite Protests

Prime Minister Ryutaro Hashimoto's coalition cabinet in June approved a plan to raise the national consumption tax to five per cent from three next April 1, citing a need to cope with the costs of an ageing society and a burgeoning budget deficit.

Two groups within Hashimoto's own conservative Liberal Democratic Party (LDP), however, have now come out in favour of freezing the increase and crafting a large extra budget for this fiscal year to keep Japan's economic recovery on track.

The moves follow LDP public relations chief Shizuka Kamei's statement late last month that the party would soon take up the issue of freezing the tax rise a comment he later toned down by saying he was merely reflecting one view within the LDP.

The calls to freeze the tax rise reflect politicians' concern over the impact of the unpopular step on their reelection prospects.

in a general election some pundits say could come later this year or early next.

No election needs to be held until July 1997.

The consumption tax hike is highly visible and disliked by any young politician, said Jesper Koll, chief economist at JP Morgan in Tokyo. The cries of dismay are only logical, he added.

The main opposition Shinshinto is also expected soon to formalise its own opposition to implementing the tax rise on schedule, although its stance is complicated by the fact that party chief Ichiro Ozawa has publicly urged an eventual increase to 10 per cent as part of broad tax reform.

Shinshinto has chosen this area to gain some points by criticising the consumption tax hike, said Takashi Kiuchi, chief economist at the Long-Term Credit Bank of Japan (LTCB).

The Social Democratic Party, the other main partner in Hashimoto's coalition, which agreed to the increase two years ago, has lately been silent on what for many members is a touchy subject. The party bitterly fought introducing the tax in 1989, when it was in opposition.

Public dislike of the tax was a key factor behind the LDP's loss of its long-held Upper House majority that year.

Not surprisingly, many voters are loath to see the higher tax rate implemented. A survey by a private think-tank showed that some 70 per cent of those polled opposed a higher consumption tax, although those with bigger paychecks preferred that option to higher income taxes, while the reverse was true for those with lower incomes.

Despite its unpopularity and worries that implementation would add to the fragility of the economic recovery, analysts say Japan's fiscal woes mean the government should and probably will implement the tax increase on schedule.

Finance minister Wataru Kubo said on Tuesday that a large extra budget combined with a freeze on the consumption tax increase and continued special income tax cuts would suck up funds worth more than 10 trillion yen ($91.7 billion), just when Japan is struggling to clean up its budgetary mess.

Japan's budget deficit, bloated by pump-priming packages aimed at prodding the economy out of a five-year slump, is already higher than those of most leading industrial nations.

Politicians seeking to make the step more palatable, however, could well seize on extending the special income tax cuts, put in place in 1995/96 to boost the stalled economy.