Noda Reshuffles Cabinet To Gain Sales Tax Support

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

16 January 2012

In a move designed to defuse fractious relations with opposition parties, Japanese Prime Minister Yoshihiko Noda has significantly reshuffled his cabinet to promote discussion on the prospect of doubling the nation's consumption tax.

Opposition parties, who hold a majority in the nation's upper house of parliament, have demanded early elections, and have indicated they will not discuss fiscal policy and would block government's attempts to hike the nation's sales tax to 10% in two stages to fund the nation's ballooning social security bill. Under the plan, the tax would increase from its present rate of 5% to 8% in April 2014, and rise again to 10% in October 2015.

Under the reshuffle, Katsuya Okada has been appointed deputy prime minister with responsibility for social security and tax reform. Okada, who has historically been a positive force for the Democratic Party of Japan in talks with opposition parties, has been appointed by Noda to act as an intermediary on sales tax discussions, scheduled for March.

Two ministers, Yasuo Ichikawa, the defense minister and Kenji Yamaoka, the consumer affairs minister, have been replaced in the reshuffle in a bid to present a more conciliatory face in the upcoming discussions.

The issue of raising the nation's consumption tax has historically been political poison for Japanese prime ministers, and those who have dared to suggest that it should be hiked to help the government pay its way have not lasted long in power. The tax was introduced in 1989 during the tenure of Prime Minister Noboru Takeshita. His popularity slumped, however, soon afterwards. A subsequent increase in the tax to 5% in 1997 was widely blamed for Prime Minister Ryutaro Hashimoto's fall from office.

With nine members of the ruling Democratic Party of Japan (DPJ) in the lower house of parliament having already quit the party over the consumption tax proposal, and more defections expected, Noda faces a tough, and some might say impossible, task in trying to get his tax plans through parliament. Noda has warned that without tax increases, including the consumption tax, "it will be difficult to guarantee a sustainable social security system".

Doubling the tax would raise about JPY2.5 trillion (USD32bn) in new tax revenues for a country which is currently financing much of its budget by issuing bonds and adding to the unfeasibly large government debt mountain which now stands at well over 200% of gross domestic product.

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