Tue, Mar 29, 2011 - Page 10 News List

Tax hike unavoidable: Japan officials

POPULAR SUPPORT:According to an opinion poll released on Sunday, an increase in taxes to help fund reconstruction efforts is endorsed by 67.5 percent of the public

Bloomberg

A tax increase to finance earthquake reconstruction may be unavoidable considering Japan’s huge debt, two Japanese governing party officials said, and two-thirds of the public agree the measure might be necessary.

“We can’t avoid raising taxes as the great earthquake may worsen an already dangerous fiscal situation,” Ikkou Nakatsuka, deputy chairman of the tax committee of the governing Democratic Party of Japan (DPJ), said in an interview last week. “We may have the public’s understanding if it’s spent for quake reconstruction.”

A levy increase may help to push back the possibility of a future fiscal crisis with public debt already about twice the size of the US$5 trillion economy. About 67.5 percent of the public support higher taxes to fund reconstruction after Japan’s strongest quake on record, according to an opinion poll released on Sunday by Kyodo News.

“Tax hikes would certainly be on the table considering Japan’s massive debt burden,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co.

The government estimates that the reconstruction could cost as much as ¥25 trillion (US$306 -billion). The magnitude 9.0 earthquake and an ensuing tsunami have left more than 27,000 people dead or missing.

Japanese Chief Cabinet Secretary Yukio Edano also said yesterday that ruling and opposition parties would review a proposal to cut corporate taxes as they discuss ways to fund rebuilding the northeastern area after the March 11 earthquake and tsunami.

Nakatsuka has suggested a 2 percentage point increase in the sales tax rate, currently at 5 percent, to secure about ¥5 trillion a year.

It would be the first increase in the sales levy since 1997, when it was raised to 5 percent from 3 percent. The economy fell into a recession after the increase and the Liberal Democratic Party (LDP), which was in control at the time, lost an election as a result. Mentioning a possible increase in the tax was one reason Japanese Prime Minister Naoto Kan’s DPJ lost control of the upper house in a national ballot last year.

Shinichiro Furumoto, a DPJ member and director-general of the party’s fiscal committee, said a sales tax would be the desirable option for raising reconstruction funds.

“Only the consumption tax imposes the burden equally among citizens, from young to old and from men to women,” he said in an interview last week.

Some other lawmakers in both the ruling and opposition parties are against tax increases, saying the measure would damage private demand that is already depressed in the aftermath of this month’s disaster.

“There’s no way that taxes can be increased when there’s deflation,” Kozo Yamamoto, a member of parliament with the opposition LDP, said in an interview last week.

He instead called for a ¥20 trillion rebuilding program financed by Bank of Japan debt purchases. A group of ruling-party lawmakers submitted a similar proposal to Japanese Finance Minister Yoshihiko Noda this month, DPJ member Yoichi Kaneko said in a blog post.

The disaster may cause Japan’s GDP to shrink by as much 12 percent on an annualized basis in the second quarter, Morgan Stanley MUFG Securities Co predicted.

LDP leader Sadakazu Tanigaki appears to disagree with Yamamoto’s views, as he said this month that he proposed to Kan a temporary tax to help fund the relief effort.

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