But among Tokyo’s top politicians, the tax issue has so far led only to a sluggish form of combat, with disagreements over when rates should jump, how much they should jump and whether they should jump at all.
The emerging global slowdown has complicated the debate, with some now saying that a tax increase amid a recession would merely inflict more short-term damage on Japan’s economy. Inaction, of course, brings its own risks: A recent Credit Suisse research report suggests that if Japan doesn’t soon show progress toward tax reform, the credit rating agency Moody’s Investors Services , as part of its ongoing review, could downgrade Japan “in late August or soon thereafter.”
Last week, two of the leading candidates to become Japan’s next prime minister, replacing the soon-to-resign Naoto Kan, planted themselves on opposite sides of the tax debate with dueling statements in the Bungei Shunju monthly magazine. Current finance minister Yoshihiko Noda said he wanted to bump the tax rate “with firm determination.” Sumio Mabuchi, the former transport minister, said he preferred a long-term strategy where a fundamental economic recovery helped repay the debt. “We should not head toward a tax increase,” Mabuchi said.
Like many of the European countries buckling under their debt, Japan faces an untenable strain, with more elderly to support and fewer workers to support them. And its government debt, 218 percent of GDP, is highest in the world.
But Japan, in several key ways, faces a far different calculus than those countries, and, at least for the short-term, it’s less prone to crisis. Some 95 percent of Japanese government bonds are domestically held. Deep household savings still far outweigh public debt. That leaves Japan, despite the scary numbers, with a stable bond market: Companies and families deposit their assets at Japanese banks. Those banks purchase government bonds. Trust and conservatism holds the system together.
Japan’s government, economists say, can prevent a potential crisis — where unraveling confidence triggers a sell-off of yen-held assets — by simply keeping the deficit from flying higher. A June report issued by the IMF called on Japan to triple its 5 percent consumption tax rate — still below the 20 percent average in European countries — within the next several years. Such a move, the report said, would represent half the fiscal adjustment necessary to put the public debt ratio “on a downward path.”
“Without fuller exploitation of the potential of the consumption tax,” the report added, “it is hard to see how fiscal sustainability can be restored.”