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Japan's Consumption Tax Debate Resurfaces

by Mary Swire,, Hong Kong

09 July 2007

The debate over whether Japan should increase its rate of consumption tax has resurfaced ahead of parliamentary elections set for the end of July, although the government has said that a decision will not be made on the tax until later in the year.

Addressing a news conference last week, Chief Cabinet Secretary Yasuhisa Shiozaki said that the government is set to conduct "full-scale discussions" on tax reforms, including the issue of the consumption tax, in the autumn. However, he added that if the government decided to go through with a radical tax overhaul "we will need to ask the public for their views".

Prime Minister Shinzo Abe is attempting to follow through on a pledge to balance the budget by 2011, but the government has been vague on its tax and spending plans for fear of losing popularity. However, with pension provision expected to keep rising, and with the government planning to increase the amount it contributes to the social security pool from 2009, tax hikes are expected to come in 2009/10.

Japan has one of the highest levels of government debt in the industrialised world which, at $6.8 trillion, is about one-and-a-half times the size of its gross domestic product.

Abe is likely to remain tight-lipped on the issue of consumption tax until after elections to the upper house of parliament on July 29, for fear of scaring the electorate with talk of a consumption tax rise, a subject which has traditionally been political suicide for Japanese prime ministers. In 1989, Prime Minister Noboru Takeshita's popularity slumped after he presided over the introduction of consumption tax at 3%. Then, an increase in the tax to 5% in 1997 was widely blamed for Prime Minister Ryutaro Hashimoto's removal from office.

Japan's consumption tax rate remains at one of the lowest rates among the thirty members of the OECD, and supporters of a hike argue that there is room for an increase in the rate to 10%, noting that this will still be much lower than consumption taxes in other major economies, especially in Europe, where such taxes typically range between 15% and 20%.

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