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Japan's Koizumi Being Driven Towards Raising Taxes

by Mary Swire,, Hong Kong

28 October 2002

This will be make-or-break week for Japanese Prime Minister Junichiro Koizumi and his protege Financial Services and Economics Minister Heizo Takenaka, whose proposals for cleaning up the stricken Japanese banking sector ran into a wall of opposition from senior figures in the ruling coalition over the weekend.

Mr Takenaka's plan was to have been published last week, but has been held back while adjustments are made and while Mr Koizumi attempts to face down his critics.

Opponents to the plan focus particularly on the proposal to reduce the use of deferred tax as equity by banks: currently banks are allowed to use tax credits on loan loss provisions for up to 40% of their capital, and Mr Takenaka wants this reduced to 10%, which is likely to push many banks' capital well below the statutory 8% level, in turn forcing the government to support them.

A package formulated by the three ruling coalition parties - the LDP, New Komeito and the New Conservative party - and unveiled on Sunday, calls instead for the treatment of deferred tax assets to be left unchanged, tax cuts of 2,000bn yen (US$11bn), and a reflationary supplementary budget.

Mr Koizumi seems boxed in. If he presses Mr Takenaka into significant weakening of his plan it will undermine his new financial services minister just weeks after his appointment; on the other hand if he pushes forward with reform, unpopular tax rises seem unavoidable since Mr Koizumi has no room to borrow within the self-imposed 30 trillion yen ceiling for government debt issuance this year, which has already been reached, if not breached.

In statements over the weekend, ruling coalition leaders called for the government to focus on economic stimulus measures rather than tackling the non-performing loan problem. "What is the purpose of nationalizing the banks?" said New Conservative Party leader Takeshi Noda on a Fuji television program. "We need measures to tackle deflation first."

A copy of Takenaka's interim report says the government would play an active role in cleaning up the bad loan mess at major banks, and Finance Minister Masajuro Shiokawa said on Friday that his ministry would be prepared to provide additional spending for such steps. With tax revenues falling short of projections due to the sluggish economy, it's likely that a supplementary budget would need to raise between 3 trillion and 5 trillion yen.

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