Japanese Parties Agree Reconstruction Funding

by Mary Swire, Tax-News.com, Hong Kong

15 November 2011

The ruling Democratic Party of Japan has agreed with the opposition parties, led by the Liberal Democratic Party (LDP), to increase the originally proposed 10-year term of the special bonds that will finance the bulk of the government’s JPY12.1 trillion (USD156.9bn) third reconstruction budget, to 25 years.

It is planned that the bonds will be repaid, over time, from spending cuts, the sale of public assets and increased tax revenue. If the bonds’ maturity had been approved at 10 years, higher individual income tax rates would have been implemented for a period of ten years from January 2013, while, from April 2012, there would have been a three-year corporate surtax. A tobacco tax rise would have also started in October next year and lasted for up to ten years.

When announcing the budget, Prime Minister Yoshihiko Noda had expressed the hope that, by restricting the bonds’ maturity to 10 years, the burden of reconstruction would not be passed onto future generations, but that resolve has now been somewhat compromised. However, the compromise on 25 years is probably not as bad, in the government’s eyes, as it could have been, given that the LDP seems to have originally sought a 60-year term.

It is now reported that the compromise agreed between the parties will seek to raise JPY10.5 trillion through individual income tax and corporate tax increases, but that the proposed rise in tobacco tax has been shelved. The latter had been persistently opposed by the LDP, due to its perceived effect on the country’s tobacco farmers.

Obviously, the extension of the bonds’ maturity will mean that the increases to tax rates will also be spread over a longer period, and that the necessary percentage hikes will be more than halved.

The government now hopes that it will be able to meet its target of obtaining parliamentary approval for the budgetary bills this month.

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