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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Japan Weighs Scrapping Company-Tax Cut, Lifting Sales Levies

Posted by WARREN MOSLER on March 29th, 2011

More talk on ‘paying for’ the reconstruction.

Fearing they could be the next Greece will ensure they remain in the rut they’ve been in for most of the last two decades.

Global austerity continues to push Europe towards the tipping point of where cutting spending and increasing taxes starts raising deficits though economic weakness/automatic fiscal stabilizers.

China appears to be continuing to ‘tighten’ to fight inflation, even though growth has already slowed considerably.

The US govt seems heck bent on cutting spending even in this fragile recover, and with risks to overseas demand for our exports at risk from global austerity measures.

Crude went up very little with the NATO action in Libya, and seems to have stabilized at current levels of Brent. That means at some point (when delivery issues get sorted out) WTI converges to Brent.

It remains to be seen how much the earthquake in Japan will slow down world gdp in Q2 due to parts shortages.

It’s starting to look to me like the US needs current levels of federal deficit spending just to muddle through without a pickup in private sector credit expansion, which historically means housing and cars. I don’t see any signs of life in housing yet, and cars could soften some for Q2 due to parts issues.

The lack of understanding of monetary operations (along with burning up our food supply for motor fuel) is now driving global unemployment to the point of social unrest.

Another setback can only make things worse.

Japan Weighs Scrapping Company-Tax Cut, Lifting Sales Levies

By Kyoko Shimodoi and Toru Fujioka

March 29 (Bloomberg) — Japan’s ruling party is considering
abandoning a proposed corporate-tax cut and boosting levies on
individuals to help pay for earthquake reconstruction and reduce
the need to step up bond sales.

Vice Finance Minister Fumihiko Igarashi said yesterday the
government may scrap the planned 5 percentage-point reduction in
company tax rates, a step that the head of the nation’s largest
business lobby endorsed. The deputy chairman of the Democratic
Party of Japan’s tax committee, Ikkou Nakatsuka, said separately
in an interview: “We can’t avoid raising taxes as the great
earthquake may worsen an already dangerous fiscal situation.”


Increasing taxes would risk deepening the hit to economic
growth in the aftermath of the nation’s record earthquake and
ensuing tsunami on March 11. Some legislators have instead
advocated that the Bank of Japan buy debt directly from the
government to pay for the reconstruction.

“A tax increase will likely dampen personal consumption
when household sentiment has already cooled,” said Norio
Miyagawa, senior economist at Mizuho Securities Research and
Consulting Co. in Tokyo. He also said that “if the government
totally calls off a corporate tax cut, not temporarily abandons
it, it could accelerate the risk of the hollowing out of Japan”
as manufacturers shift operations abroad.

Toyota, Sony

Company earnings are likely to be impaired by the
catastrophe, which forced firms from Toyota Motor Corp. to Sony
Corp. to suspend factories in the devastated northeast and
elsewhere as supply chain and power disruptions spread. The
Nikkei 225 Stock Average fell 1.6 percent to 9,330.12 at 9:54
a.m. in Tokyo. It has lost about 11 percent since the temblor.


Prime Minister Naoto Kan may avoid a political cost from
the tax measures, as 67.5 percent of the public support higher
levies to fund reconstruction, according to an opinion poll
released by Kyodo News two days ago. A tax increase may help to
push back the possibility of a future fiscal crisis with public
debt already about twice the size of the $5 trillion economy.


The government estimates damage from the disaster, which
left more than 27,000 people dead or missing, at as high as 25
trillion yen ($306 billion).

Sales Tax Increase

Japanese government data released today suggested that the
economy was recovering in February before the quake struck this
month. The unemployment rate unexpectedly fell to 4.6 percent
from January’s 4.9 percent, according to the statistics bureau
in Tokyo. The number of available jobs rose to the highest level
in two years, and retail sales increased last month, the data
showed.


Goldman Sachs Group Inc. today said Japan’s economy will
shrink next quarter and lowered its growth forecast for the year
starting April 1 to 0.7 percent from 1.3 percent.


Finance Minister Yoshihiko Noda said today he believes
taxpayers are willing to help pay for the rebuilding.


To raise about 5 trillion yen a year for the reconstruction,
Nakatsuka has suggested a two-percentage point increase in the
sales tax rate, currently at 5 percent.


It would be the first increase since 1997, when the sales
levy was raised from 3 percent. The economy fell into a
recession after the increase and the then ruling Liberal
Democratic Party lost an election as a result. Mentioning a
possible increase in the tax was one reason Kan’s DPJ lost
control of the upper house in a national ballot last year.

Corporate Tax

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


“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.


To secure more funds, the government may forego the planned
reduction in the corporate tax rate, Igarashi told reporters
yesterday. The levy cut, which was supposed to begin in the year
starting April 1, would have decreased revenue by between 1.4
trillion yen and 2.1 trillion yen, according to calculations by
the Ministry of Finance.


The company tax rate in Tokyo is 40.69 percent, compared
with 28 percent in the U.K. and 25 percent in China, according
to the ministry’s data.


“If this will lead to a speedy reconstruction, personally
it’s fine with me if the tax reduction is scrapped,” Hiromasa
Yonekura, chairman of the business lobby Keidanren, told a news
conference yesterday

Budget Overhaul

The government will need to review its entire budgetary
spending and revenue plans when examining how to fund
reconstruction, Katsuya Okada, the No. 2 official of the DPJ
said yesterday.


Some other lawmakers in both the ruling and opposition
parties are against tax increases, saying such steps would
damage private demand already depressed by the disaster.


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


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


The LDP’s 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.


Moody’s Investors Service said after the quake that Japan
may eventually reach a fiscal “tipping point” if investors
lose confidence in the soundness of public finances and demand a
risk premium on government bonds.


Japanese Economic and Fiscal Policy Minister Kaoru Yosano
said today the country is close to its limit in terms of the
amount of bonds it can sell.

12 Responses to “Japan Weighs Scrapping Company-Tax Cut, Lifting Sales Levies”

  1. mike norman Says:

    And I read today that Japanese lawmakers will take a 15% pay cut for the next six months to help “pay” for the reconstruction.

    Reply

    WARREN MOSLER Reply:

    they risk turning themselves into the next Japan…

    Reply

    Keith Newman Reply:

    “they risk turning themselves into the next Japan…”

    Hilarious! Got a good laugh from that.

    Reply

  2. mike norman Says:

    All this is making me very bearish on Japan. At first I thought the disaster would lead to a huge fiscal stimulus, but it doesn’t look like it. They are paralyzed by debt fears and what the rating agencies might do.

    Reply

    WARREN MOSLER Reply:

    which makes me scared too!
    :(

    Reply

  3. ESM Says:

    Japan could actually turn out to be a very complicated situation. I read an analysis that showed that TEPCO has lost roughly 50% of its peak electricity generating capacity for quite some time (possibly years), and that the current capacity is 40% below the peak summer demand for its customers. TEPCO’s customers represent 1/3 of Japan’s population and 40% of Japan’s GDP. Furthermore, there is almost no way to re-route significant amounts of electricity from other regions.

    So, we’re looking at a situation where a hyper-modern country has quite suddenly lost a very significant fraction of its electrical capacity. Could this be a supply shock that starts an inflationary spiral? I doubt it, but it’s a tricky situation. It’s not obvious that Japanese government deficits should be increased at this time.

    Reply

    WARREN MOSLER Reply:

    so you would propose they just simply let the price go to where it needs to be to bring supply/demand into ‘equilibrium?’

    Reply

    beowulf Reply:

    What would MacArthur do?

    It seems especially strange, in retrospect, that stringent ratios of reserves to deposits were not imposed and enforced on the Japanese banks. However, the late forties was perhaps the most extreme period of the most extreme form of Keynesian doctrine, prior to the so-called “rediscovery of money” at the turn of the decade. According to this doctrine,
    the quantity of money did not really matter.

    To cite a Japanese example of such extreme Keynesianism, Tanzan Ishibashi, editor of the Oriental Economist and Finance Minister in the first Yoshida cabinet, maintained that no budgetary deficit or monetary expansion could be called inflationary, whatever might be happening to the price level, so long as there remained persistent unemployment. And among the Americans, many ex-OPA economists from Washington brought with them to Tokyo the anti-quantity-theory doctrine that the way to check inflation was price control.
    http://webcache.googleusercontent.com/search?q=cache:WWuuXT8STW4J:kuscholarworks.ku.edu/dspace/bitstream/1808/1189/1/CEAS.1968.n2.pdf

    Reply

    roger erickson Reply:

    you mean “reawakening of the banking lobby”

    ESM Reply:

    “so you would propose they just simply let the price go to where it needs to be to bring supply/demand into ‘equilibrium?’”

    Absolutely! In this case you have 40MM people and thousands of industries using electricity. Many different uses, many different needs, many different individual utility functions. It is best to let the price float, and then based on where the clearing price is, make cash payments to households so that even the poorest families can buy enough electricity to meet minimum needs.

    Those people who can tolerate going without air conditioning in the summer will go without and pocket the cash. Marginal businesses will be shut down. Entrepreneurial people will import generators and sell them. A free market will allow the scarce resources to be optimally allocated, including those resources around the world needed to mitigate the local shortage.

    I don’t see how anybody can think a program of rolling blackouts is the best solution, although undoubtedly, that’s what the Japanese are going to get.

    Reply

    WARREN MOSLER Reply:

    let a few hospitals shut down if they didn’t have the funds in their budget for the year, outbid by the wealthy who paid up to air condition their outdoor patios for dinner parties?

    Tom Hickey Reply:

    ESM, you want serial government failures, I presume. There is a political dimension to economics, you know. Have you been keeping track of the number of governments that have fallen recently? Some pretty hard.

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