Posted by WARREN MOSLER on December 25th, 2011
Dec 26 (Bloomberg) — Prime Minister Yoshihiko Noda’s next task is securing support for a higher sales tax after Japan’s budget for the next fiscal year showed a record dependence on borrowing to fund government spending.
The government will sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen of spending, raising the budget’s reliance on debt to an unprecedented 49 percent, a plan approved by the Cabinet in Tokyo on Dec. 24 showed. While spending will decrease for the first time in six years, Noda will delay funding the nation’s pension fund and will create a separate budget account to pay for earthquake reconstruction.
An aging population and two decades of low growth after an asset bubble popped in the early 1990s have left Japan with debt projected at a record 1 quadrillion yen this fiscal year. Noda faces opposition from the public and within his Democratic Party of Japan to increasing the levy even as Standard & Poor’s considers further cutting the nation’s credit rating, reduced in January to AA-.
“The government should hike the consumption tax rate and cut social security spending as soon as possible,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. and a former Bank of Japan official. “This is urgent. We do not have the luxury of losing any more time.”
About 53 percent of voters oppose an increase, with a third saying Noda should call an election before such legislation, news service Jiji Press said last week, citing a Dec. 9-12 survey of 2,000 people. The DPJ lost its majority in the upper house of the parliament last year after then-Prime Minister Naoto Kan campaigned on a pledge to cut spending and raise the 5 percent sales tax.
DPJ lawmakers with weak electoral majorities may be “tempted to vote for their constituents’ purses” by opposing an increase, said Jun Okumura, a former Japanese trade ministry official and a consultant at the Eurasia Group risk consulting firm in Tokyo.
While Japan’s gross domestic product grew an annualized 5.6 percent in the three months ended September as demand picked up after the March 11 earthquake, the pace will probably slow. The median estimate of 11 economists surveyed by Bloomberg News is for growth of 0.42 percent this quarter. Of the 10 polled this month, five predict GDP will shrink.
Gains in the yen are weighing on growth by eroding exporters’ profits, a factor cited by Moody’s Investors Service in cutting the rating outlook for Toyota Motor Corp. on Dec. 22. Europe’s debt crisis is reducing demand for the nation’s products, while earthquake reconstruction costs will swell spending. The yen traded at 78.09 per dollar on Dec. 23 after touching a post-World War II high of 75.35 on Oct. 31.
Sales Tax Plan
Noda’s party will today present a plan for raising the sales tax, lawmaker Shinichiro Furumoto said last week. The ruling coalition plans to raise the rate to 8 percent in October 2013 and 10 percent in 2015, Kyodo News reported Dec. 21, citing government sources.
The International Monetary Fund says a gradual increase to 15 percent “could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.” Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo, advocates boosting the tax to “at least” 20 percent.
‘Not Normal Times’
Former DPJ leader Ichiro Ozawa and Shizuka Kamei, the head of the People’s New Party, a coalition partner, aim to head off the move. Kamei said this month that “we’re not in normal times, and it’s folly to be playing around with the tax system.”
So far, Japan’s debt burden hasn’t impeded the government’s ability to borrow, with 10-year bond yields poised to close below 1 percent for the first year since 2002.
Noda’s spending plan for the year starting April includes a 3.8 trillion yen special account for reconstruction spending.
Besides the consumption tax, a government panel proposes increasing the highest personal income tax rate to 45 percent from 40 percent by the middle of this decade.
“Japan’s government is proposing the right remedies for the country’s fiscal debt problems, but the speed is too slow and we can’t be confident that the measures will actually be implemented,” said Hitoshi Suzuki, a senior researcher of Daiwa Institute of Research in Tokyo.
Tokyo-based Ratings & Investment Information Inc. cut Japan’s rating for the first time on Dec. 21. S&P has a negative outlook for the nation and said last month that a downgrade may be getting closer after insufficient progress in tackling a public debt burden that is the world’s biggest.
Japan’s structural deficit “is completely out of whack because of increasing social security demands and costs,” Schulz of Fujitsu said last week. “If the government remains lazy in terms of hiking the consumption tax rate, it’s just a matter of time before the very obedient Japanese investors are no longer happy to finance the deficit.