Japan to Double Its Consumption Tax by 2015?!

Finally, the verbal duels are over! After months of debate and deliberation, Japan’s lower house decided to pass the bill that would take sales tax from 5% to 8% in 2014 and then up to 10% in 2015. Yep, you heard that right – Japan will be doubling its consumption tax by 2015!

Backed by the ruling Democratic Party of Japan (DPJ), the bill also got the green light from lawmakers from two of Japan’s major opposition parties. A total of 363 members of parliament said “Yay!” and voted in favor of the bill, overwhelming the 96 lawmakers who said “Nay!”

Impact on the Economy

The Good
On one hand, the passage of the bill shows that the government isn’t taking its ballooning debt lightly. And rightfully so! Estimates already have gross public debt growing to a record high of 223% of GDP by next year.

According to the Cabinet Office, bumping up consumption tax to 10% would bring in an additional 13.5 trillion JPY in revenues, which would go a long way in easing Japan’s current annual fiscal deficit of 45 trillion JPY.

The Bad
But not everyone’s convinced that passing the bill was the right move. Those who have spoken against it believe it could do the economy more bad than good, and from where I’m standing, they do present a valid point.

With such a tax hike, the government runs the risk of weakening domestic demand and further stunting economic growth. That’s something Japan will definitely want to avoid, as government estimates see real GDP growth clocking in at an average of just a little over 1% until 2020.

As a matter of fact, the Cabinet Office thinks that a 1% increase in consumption tax could slash real GDP growth by 0.32% in the year after implementation.

The tax hike won’t do any good to the country’s consumer prices either. The government estimates that it could elevate the inflation rate from 3.1% to 3.8% in 2014, up from current estimates of only 0.7% to 1.4%. If you remember, the BOJ is only targeting a 1% inflation rate.

Besides, increasing tax revenues alone won’t be enough to reign in its ginormous public deficit. Analysts believe that stimulating the economy and implementing stricter austerity measures like cutting social security spending and raising the retirement age are also needed for the tax hike to work.

Impact on Political Stability

The Good
Say what you want about the Prime Minister, but you gotta admit that he gets things done! Aside from showing world markets that the government can quickly decide on economic reforms, the passing of the bill also marked a strong interparty political will to fix Japan’s finances. There’s hope of getting different parties to unite after all!

The Bad
Unfortunately for Noda, the passing of his pet bill comes with a high price. 57 of the 96 lawmakers who said “Nay!” came from Noda’s party, the DPJ. Word in the hood is that if 54 or more lawmakers leave the party, the DPJ would lose majority in the lower house and trigger an election ahead of the scheduled one in mid-2013.

Ichiro “The Destroyer” Ozawa, former DPJ President, has also threatened to take 50 or so members with him and start his own party. He said that he and other opponents of the bill may submit a no-confidence motion, which could lead to the resignation of Noda’s Cabinet or dissolution of the lower house. Yikes!

The passage of the bill doesn’t immediately translate to execution though. The Diet’s session is extended until September 8 this year, so we might still see opposition in the upper house. Even then, its implementation is still based on the condition that average annual nominal and real gross domestic product growth can reach 2% by 2020. Will Noda stay in power long enough to implement his pet bill?

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