Bloomberg News

Noda Victory on Japan Sales Tax Law Risks Party Majority

June 27, 2012

Prime Minister Yoshihiko Noda

Japan's Prime Minister Yoshihiko Noda has vowed to stake his political career on boosting the levy to rein in record debt and soaring welfare costs. Photographer: Haruyoshi Yamaguchi/Bloomberg

Japanese Prime Minister Yoshihiko Noda’s biggest step yet toward winning a sales tax increase aimed at reining in the nation’s public debt came at the cost of alienating one-fifth of his party’s lower house lawmakers.

While the chamber yesterday approved legislation to double the 5 percent levy by October 2015, 57 lawmakers in the ruling Democratic Party of Japan voted no, and former DPJ leader Ichiro Ozawa signaled he may leave. If he takes more than 50 followers with him, it could endanger the party’s majority.

Noda, who called the rebellion “unfortunate,” now must hold together a deal with the opposition Liberal Democratic Party to win passage for the bill in the upper house. With the Diet session extended until Sept. 8, weeks of wrangling may be in store for a country that has seen six leaders since 2006.

“Noda got the bill passed, which is what he wanted, but it came at a very high price,” said Koichi Nakano, a political science professor at Sophia University in Tokyo. “Now he has to decide whether to play hardball and expel the rebels, which could imperil the bill, or try to be more conciliatory and buy some time.”

Under the bill, the consumption tax will rise to 8 percent in April 2014 and to 10 percent in October 2015. The measure passed by a vote of 363-96. The DPJ has 289 members in the 480- seat chamber.

Stocks swung between gains and losses today after the vote, with the Nikkei 225 Stock Average (NKY) up 0.3 percent at 1:21 p.m. in Tokyo. Japan’s benchmark 10-year yield was 0.805 percent, having reached a nine-year low of 0.79 percent on June 4. The yen was trading at 79.48 to the dollar, having strengthened more than 5 percent since mid-March.

‘First Step’

“We have taken a big first step toward reform, both for the sake of present-day Japanese and for future generations,” Noda told reporters yesterday in Tokyo. Those who voted no will be dealt with “strictly, according to party rules,” he said.

DPJ Secretary-General Azuma Koshiishi said he would deal with the situation “calmly.”

Ozawa and his backers argued the bill breaches the platform on which the party took power in 2009 after the LDP’s half- century of rule, and may discourage consumers from spending and fail in its aim of boosting tax revenue.

Ozawa told reporters that he will make “a final effort” to work within the DPJ. While he was the engineer of the party’s 2009 victory, since then he has denounced the party’s cutbacks on child-rearing subsidies and last year supported a no- confidence motion against Noda’s predecessor, Naoto Kan.

‘Every Effort’

“I believe we are very close to a general election, so we can’t waste time,” he said at a press conference. “I will make every effort, but in any case I will have to decide what to do in the near future.”

Passage in the upper house is likely thanks to backing by the LDP and New Komeito party. Noda has vowed to stake his political career on boosting the levy to rein in ballooning debt and soaring welfare costs.

His defiance of Ozawa and this month’s decision to take the publicly unpopular step of restarting two atomic reactors shut down after last year’s nuclear disaster may boost his leadership credentials, analysts including Jun Okumura said.

“As a prime minister you want to get things done and Noda is getting things done,” said Okumura, a senior adviser for the Eurasia Group consulting firm in Tokyo and a former trade ministry official. “He’s done a pretty good job of setting priorities and sticking to them. The next question is will Ozawa stay in the party or bolt, but many in the DPJ will be happy to see him leave.”

Credit Rating

The International Monetary Fund and the Organization for Economic Cooperation and Development have both urged Japan to be more aggressive in tackling a debt that the OECD predicts will reach 223 percent of gross domestic product next year.

Fitch Ratings cut the country’s sovereign-credit rating in May, citing a “leisurely” approach to shoring up its finances. Andrew Colquhoun, Hong Kong-based head of Fitch’s Asia Pacific sovereign ratings, said the tax bill remains subject to political risk and the outlook on Japan’s credit rating remains negative.

Raising the sales tax should be a “top priority” and reducing the public debt burden is “essential,” the OECD said last month in a report. Delays in restoring the fiscal health of the world’s third-largest economy could risk a run-up in government borrowing costs, it said.

To contact the reporters on this story: Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net; Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net


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