Japan’s ruling Democratic Party and the opposition initiated talks on a proposed sales tax hike yesterday, aiming to clinch a deal by the end of next week to secure parliamentary approval of a plan that not long ago appeared all but doomed.
The start of negotiations and commitment to a tight schedule are important stepping stones for Japanese Prime Minister Yoshihiko Noda, who only few months ago was given hardly any chance of pushing his signature plan through Japan’s divided parliament.
“We agreed to do our utmost to conclude consultations about amendments by June 15,” a Democratic Party official said after the meeting, referring to related tax and social security bills.
Investors and rating agencies see progress on the plan to double the sales tax to 10 percent by October 2015 as a test of Tokyo’s resolve to tackle its ballooning debt.
Noda has staked his political future on the plan’s fate. He says he wants to pass the tax and social security bills during the current parliamentary session that ends on June 21.
Noda has long faced resistance within his own party and pressure from the opposition, which had threatened to block bills in the Upper House, which it controls, to force the prime minister to call an early election.
However, in recent weeks, the Liberal Democratic Party (LDP) — the main opposition party — has softened its stance, saying a compromise was possible if the Democrats agreed to drop parts of a social security reform plan which could boost spending.
Noda’s recent talks with former Democrat leader Ichiro Ozawa, and a vocal opponent of the tax rise, failed to produce any results. Though with LDP help, the bills can still pass even if Ozawa’s followers offer no support.
To smooth the way to a deal, Noda on Monday replaced five Cabinet members who had been criticized by the media and the opposition for their performance.
There is still a risk that talks will fail given that LDP demands may be hard to swallow for the ruling Democratic Party, who swept to power in 2009 promising more generous benefits and no tax increases in the current term.
Some lawmakers may feel they still have time to instigate reforms given that Japanese government bonds continue to enjoy safe-haven status among investors fretting about the eurozone debt crisis.
However, the mounting calls from international institutions and rating agencies for the Japanese government to take action to reduce its accumulating debt may play into Noda’s hands.
For example, influential ratings agency Fitch cut Japan’s credit rating last month, citing scant progress in coping with ballooning social security costs and describing Tokyo’s fiscal consolidation plans as “leisurely.”