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Japan Fudges Timing Of Tax Increases

by Mary Swire,, Hong Kong

05 July 2011

The ruling Democratic Party of Japan (DPJ) has prevailed over the government led by Prime Minister Naoto Kan and has been able to blur the timing of the proposed rises in consumption tax, which are planned to deal with the country’s increased social security spending.

Last month, an official panel, established by Kan to work on proposals to finance the rapidly-rising costs of pensions and health care in Japan, had recommended that the country’s consumption tax, currently at 5%, should be raised in stages. It proposed that the present tax rate should be increased to 10% in two stages by 2015, with the first hike due in the next fiscal year from April 2012.

However, the DPJ has now shied away from agreeing such a move, citing the possible economic effects of a tax rise at the present time and a need to increase taxes only when an economic recovery could be better established. The party appears to fear the possible political backlash from future tax rises, more than the threat from the credit agencies to downgrade Japan’s rating if prompt action is not taken to resolve Japan’s tax and debt problems.

With Japan’s Prime Minister Naoto Kan under extreme political pressure, and the timing of his resignation being openly debated, the DPJ has only been able to agree that consumption tax could be doubled in stages "by the middle of the 2010s". No indication has been given as to when the tax rises will actually occur.

TAGS: tax | economics | pensions | sales tax | fiscal policy | tax rates | social security | tax reform | Japan

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