2012/01/24

Japan premier announces sales tax hike plan

TOKYO, January 24, 2012 (AFP) - Japan's prime minister told parliament Tuesday he will move to double sales taxes, warning that the future of the world's third-largest economy depends on turning the rising tide of public debt.

Yoshihiko Noda has staked his premiership on the issue and in his policy speech opening the new session of the Diet said he would submit legislation by the end of March that will ramp up the cost of everything from rice to Rolexes.

However, underlining the huge task ahead, the Bank of Japan also on Tuesday lowered its growth forecasts for the economy, predicting a contraction in the year to March 31, and slower growth than first tipped in fiscal 2012.

Less than five months into the job, Noda is trying to sell the deeply unpopular tax rise to a sceptical public, and avoid becoming the sixth prime minister in as many years to disappear beneath the waves of Japan's viciously factional politics.

Noda said the country has "no time to spare" in reducing its fiscal burden.

"It's impossible for young people to believe that things will get better tomorrow in a society where debts resting on future generations continue growing," he said.

"It is not too much to say that the revival of hope of the entire society depends on the success of this combined reform.

"This year must be the initial year of Japan's revival. Above all, I aim to break away from a politics that is incapable of decision," Noda said.

With burgeoning pension and social security costs in a country where the population is greying and shrinking, only around 40 percent of what the government spends is currently made up from taxes.

The rest is financed from borrowing, leaving debt at more than double the country's gross domestic product, an eyewatering ratio that dwarfs troubled Greece and will only grow unless more tax revenue is raised, experts warn.

Noda's proposals could boost annual tax receipts by roughly 10 trillion yen ($130 billion), the first step towards Tokyo weaning itself off borrowing.

The government had intended to achieve a primary balance surplus by 2020, but now admits it is unlikely to hit that target.

The plan would see consumption taxes rise to 8.0 percent in April 2014 and to 10 percent in October 2015 "on condition that the economy is going to pick up," Noda said.

The country's March 11 earthquake and tsunami had brought a series of pressing issues to bear, which politicians had a "responsibility" to address, including reform of the tax and social welfare systems, he added.

With the world's finances in dire straits, Japan urgently had to get its own fiscal house in order if it is not to fall victim to "rampaging" financial markets like some European countries have, the premier told lawmakers.

"We have no time to spare for this combined reform in terms of the need for having strong fiscal structure that will not be tossed around by the power of the financial markets," he said.

His proposals have won support from major media, businesses and international organisations, including the International Monetary Fund.

But opinion polls consistently show he has a long way to go to persuade the public of the merits of their coughing up more in an economy struggling to keep its head above the water.

The premier must underscore the seriousness of Japan's predicament to voters, and stress plans to cut government salaries and the size of Japan's bureaucracy, said Tomoaki Iwai, politics professor at Nihon University.

"Only the tax hike has drawn attention," said Iwai. "If he could show that politics is also doing its part to feel the pain and discuss the merits of the policy package, he could lay a case for people to consider."

While highlighting the need to get the country's finances in order, the central bank's prediction for growth over the next two years heaps further pressure on Noda.

The BoJ said it believed the economy would shrink 0.4 percent in the year to March 31, reversing an earlier prediction of a 0.3 percent rise in GDP.

It also said the economy would grow in fiscal 2012, but only by 2.0 percent, less than the 2.2 percent it had originally forecast, amid a "slowdown in overseas economies and the appreciation of the yen."