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CNA
21-05-2025
- Business
- CNA
Commentary: Don't reopen the ‘demon gate' debate in Japan
TOKYO: Japan is facing a changing world of tariffs, artificial intelligence, and a potentially existential threat to its number one export. Yet its approaching election seems set to be dominated by a rehash of a decades-old debate. Consumption tax, first introduced in 1989 and raised over the years to its current maximum rate of 10 per cent, is shaping up to be the major theme of July's upper house election – a poll that will determine the fate of embattled Prime Minister Shigeru Ishiba and his minority government. With the public unhappy with persistent inflation, most recently in the form of a record surge in rice prices, Ishiba's rivals are lining up with spurious proposals to cut the sales tax or eliminate it entirely. He has pushed back, arguing that Japan's fiscal situation puts it in no position to reduce revenues. Japan's 'fiscal situation is undoubtedly extremely poor, worse than Greece's,' he told parliament on Monday. While the comparison is unwise, and helped to push up bond yields, it's true that the country is in no position to be cutting taxes. Calls to do so should be ignored – Japan doesn't have time to relitigate this staid discussion. DEMON'S GATE Arguments over the levy are so persistent that it's long been described in media coverage as kimon, a phrase that literally translates as a 'demon's gate' – from the ancient superstition that entrances facing northeast are unlucky as they allow evil spirits to enter – and refers in this context to a sticky problem or potential landmine. It has led to the collapse of governments and been blamed for triggering recessions. The issue overshadowed almost the entirety of Shinzo Abe's record-breaking premiership; and it so divided the now-defunct Democratic Party of Japan that opposition to the ruling party remains fragmented to this day, helping Ishiba's Liberal Democratic Party stay in power despite widespread public dissatisfaction. A recent survey found that more than 70 per cent of respondents want the tax to be scrapped or reduced. Ishiba's decision to rule out a cut has given opposition politicians a chance to focus on the issue even more, with proposals to temporarily slash the levy on food to zero or reduce the entire tax to 5 per cent until the economy improves. Ishiba's internal rival Sanae Takaichi, who tops polls of who should be the next premier, has broken ranks, backing the idea of imposing less on food. Ishiba bears responsibility for reopening the demon's gate, however: As US tariffs roiled markets earlier this year, reports said the government was considering the measure. AN IRRESPONSIBLE AND UNSERIOUS DEBATE Of course, Japan is far from the only place where sales tax or its equivalents are repeatedly discussed. Singapore's move to raise its goods and services tax has been criticised for lifting inflation at a time when citizens were already feeling the pinch. Vietnam cut its value-added rate temporarily last year, which it may extend. And President Donald Trump has criticised the VAT levied by many countries as a non-tariff barrier that hurts US exports. But in Tokyo, the debate is both irresponsible and deeply unserious. Opposition leader Yoshihiko Noda is making a temporary cut the core of his election manifesto. But he was the one who, in 2012, passed legislation raising the rate to 10 per cent in the first place. Unlike most other countries, Japan has spent years trying desperately to stoke inflation. Now that it finally has some, the government must ensure things don't fall back – which makes it unwise to implement moves that would, at least in headline terms, be deflationary. Leaders should also avoid reawakening another old debate – Japan's considerable debt burden. The tax is the largest contributor to Tokyo's coffers, making up more than 30 per cent of revenues. While takings have increased in recent years as the economy has recovered and inflation has risen, Ishiba must still find funds for increased defence spending and the ever-rising cost of health care and other social security measures as the country ages. Detractors say the consumption tax is a regressive measure that disproportionately penalises the poor and causes more harm to the economy than good. But there are plenty of arguments to the contrary, including that it's both hard to avoid and easy to collect. Most importantly, it's on the books right now. By international levels, Japan's rate is rather low. Future generations may well debate whether to raise it, though that is not something I would argue for now. Policymakers must resist the temptation of populist proposals. The country has been crying out for a bold economic vision for years, ever since Abenomics ran out of steam. Let's find some new ideas instead of rehashing the classics.
Bloomberg
20-05-2025
- Business
- Bloomberg
Don't Reopen the ‘Demon Gate' Debate in Japan
Japan is facing a changing world of tariffs, artificial intelligence, and a potentially existential threat to its number-one export. Yet its approaching election seems set to be dominated by a rehash of a decades-old debate. Consumption tax, first introduced in 1989 and raised over the years to its current maximum rate of 10% 1, is shaping up to be the major theme of July's upper house election — a poll that will determine the fate of embattled Prime Minister Shigeru Ishiba and his minority government.
Bloomberg
19-05-2025
- Politics
- Bloomberg
Japan PM Ishiba's Support Falls, No Ouster Seen Before July
Support for Prime Minister Shigeru Ishiba's government weakened, according to public opinion surveys published by major Japanese news organizations over the weekend, although it remains unlikely he'll be ousted before a national election in July. Polls published by the Yomiuri and Mainichi newspapers, as well as a survey from Kyodo News, showed support for Ishiba's cabinet ranging from 22% to 31%, the lowest levels in each survey since Ishiba became national leader in October last year.
Japan Times
16-05-2025
- Business
- Japan Times
Don't overreact to the consumption tax debate
As Japan prepares for an Upper House election this summer, a, if not the, key issue in the campaign will be the consumption tax. Economic uncertainty in combination with rising prices are squeezing the budgets of households, businesses and the government. The focus of domestic debate to ease those pressures is the consumption tax. A growing number of parties and politicians are pressing for relief, most typically in the form of a reduction in the current levy — 10% for most items and 8% for food products. Proposals include across the board cuts, fixed temporary reductions for particular items such as food or gas, or even suspension or cancellation of the tax. The ruling Liberal Democratic Party and the government of Prime Minister Shigeru Ishiba remain committed to the current plan, however, while debating aid for households in the form of subsidies. The government's claim that it must be fiscally responsible is sound. Japan's government debt is substantial and cuts to the tax are more politically expedient than economic necessity. That does not mean that households do not need aid or assistance; rather, the case is for smart, targeted efforts that help those most in need without blowing a hole in the national budget. The consumption tax has weighed heavily on Japanese politics. It was first proposed in the late 1970s to ease financial strains as the provision of social services outstripped government revenues. That suggestion alone was enough, argue political analysts, to cost the LDP its majority in the 1979 general election. A 3% levy was eventually introduced a decade later in 1989 — after one false start two years earlier — and it was raised to 5%, the first in what was anticipated to be a gradual but steady increase in the tax. That increase contributed to the loss of the LDP's majority in the Upper House in 1998 and the resignation of then Prime Minister Ryutaro Hashimoto. The Democratic Party of Japan took power in 2009 on a platform that promised, among other things, a freeze on taxes. In 2010 then Prime Minister Naoto Kan proposed raising the tax rate to 10%, which yielded a crushing defeat for his party in the next election and the plans were abandoned. A 2012 agreement with the LDP, then in the opposition, to raise the consumption tax to 10% to help pay for burgeoning social services costs contributed to the DPJ's defeat in elections later that year. That agreement endured however and the consumption tax went from 5% to 8% in 2014. Yet even formidable Prime Minister Shinzo Abe twice delayed the scheduled hike to 10% during his second term in office out of concern for the electoral consequences. Finally, in October 2019 the consumption tax increased to 10% for most items, with food (and a few others) remaining at 8%. Meanwhile, financial demands on the government have mounted as society ages, prime ministers promise child care and defense budgets swell. Japan's government debt as a percentage of gross domestic product in 2023 was 195%, the highest share among major advanced economies. That is why government officials agree with Chief Cabinet Secretary Yoshimasa Hayashi, who warned last week that 'The government does not think it is appropriate to lower that tax rate,' noting that 'it's an important funding source for the social security system for all generations.' That position is a striking contrast — some say political suicide — when opposition parties are all calling for some relief in taxes. The Constitutional Democratic Party of Japan, the main opposition party, has proposed lowering the consumption tax on foodstuffs to zero for one year. Ishin no Kai wants to reduce the tax on foodstuffs to zero for two years and the Democratic Party for the People calls for cutting the tax to 5% across the board. Even Komeito, the junior partner in the ruling coalition with the LDP, wants some relief, although it hasn't endorsed a specific proposal. The LDP is divided, however. A substantial number of its members are worried about their political vulnerability. Sixty-nine LDP lawmakers signed a petition calling for eliminating the consumption tax on foodstuffs, and that combined with pressure from Komeito could yield a softening of the party's hard line. While there may be some political logic to the call for accommodation, — and other governments have done so — the party should not bend. Once reduced, it will be extremely difficult to raise — or more properly, restore — the consumption tax to its previous level and Japan's fiscal difficulties will be compounded. In the fiscal 2025 budget, the tax accounted for nearly one-third (32%) of government tax revenue. According to one estimate, eliminating the tax on foodstuffs would boost nominal and real gross domestic product by approximately 0.43% a year — but yield a tax shortfall of about ¥5 trillion ($33.8 billion). That does not mean that households don't need some form of help. Consumers are being squeezed. The Bank of Japan anticipates that prices will continue to rise, the product of labor shortages, disruptions to global trade resulting from the U.S. tariff policies and shortages of some products, like rice. But the virtuous cycle — in which rising prices lead to rising wages — that Japan has enjoyed in recent years is now threatened by that same uncertainty. The BOJ has lowered its forecast for the Japanese economy and has warned that the outlook could change further and some officials worry about the prospect of stagflation — a stagnant economy that suffers inflation nonetheless. While providing a stable source of revenue — such taxes are largely unaffected by economic cycles — the consumption tax weighs most heavily on low-income earners. Prime Minister Ishiba has acknowledged fiscal and political reality by noting that 'It's important to take generous measures for those who are truly in need while taking responsibility for the next generation.' Targeted measures are thus key, which rules out sweeping cuts in the consumption tax. Putting money in the pockets of those individuals and their families through subsidies, for example, may not provide economic stimulus — economists worry that payments would be saved, not spent — but they would ease the pain. Having lost its majority in Lower House elections last year, the government, the LDP and its junior partner Komeito, fear a similar outcome in the summer Upper House vote (or a worse outcome if Ishiba decides to call a snap double election). Relief for besieged consumers is important but so too is avoiding the image of pandering to voters. The public wants and needs a thoughtful government that rejects populism and focuses on the national interest — not just the need to win votes. A plan that balances the need to help households with attention to deficits will win that support. The Japan Times Editorial Board
