Consumption tax cut not a given even after Upper House election

Japan Times

7 days ago

A consumption tax cut that was such a pivotal issue in Sunday's Upper House election is not a foregone conclusion given the political realities of a minority government and the economic realities of Japan, some analysts say.
In the historic vote, the Liberal Democratic Party-Komeito coalition lost its majority and now controls neither house of parliament, although it still has the Cabinet.
It has stood firmly against lowering the consumption tax — which is currently set at 10% for most items and 8% for food and beverages — while most opposition parties have called for a reduction of the tax or simply abolishing it.
The problem for the opposition parties is that they might not be able to agree on enough to be effective against a coalition that remains the largest bloc in both houses despite lacking a majority.
'It's probably quite difficult for them to find common ground,' Tomohisa Ishikawa, chief economist at the Japan Research Institute, said of the opposition.
Markets may also make consumption tax cuts difficult.
Investors were already rattled ahead of the election, in part on the possibility that government revenues could take a hit with the implementation of policies pushed by the opposition.
The yield on 30-year Japanese government bonds surged to a record 3.2% last week, and that on 20-year JGBs hit the highest level since November 1999. Bond prices move inversely to yields.
"I believe the recent rise in the yield on superlong-term bonds was a sign that Japan's fiscal risks were being taken more seriously,' said Daiju Aoki, regional chief investment officer at UBS SuMi Trust Wealth Management.
Prime Minister Shigeru Ishiba stood firm on his stance against the tax cuts right up through election day on concerns about the fiscal stability of the country.
'If we were to implement such a policy, how would we secure funding for social welfare programs?' he said Sunday.
While pressure on the government to spend more will undoubtedly increase post-election, Aoki said a tax cut may be implemented in a way that won't seriously hurt fiscal soundness.
'By teaming up with parties against a massive government bond issuance, the LDP and Komeito can still form a majority,' he said.
Virtually all opposition parties stress the need for a consumption tax cut, but details are different.
The Constitutional Democratic Party of Japan (CDP), which is the largest opposition party and is led by former Prime Minister Yoshihiko Noda, is looking to make food nontaxable for one year.
Noda, who is considered to be on the side of fiscal discipline, said his party would only advocate a consumption tax cut that's fully funded and not dependent on bond issuance.
The LDP and Komeito could work with the CDP to minimize the fiscal risk, if a consumption tax cut really becomes a policy option, Aoki said.
'In that sense, there might be some short-term volatility, but if the bond market recognizes that there won't be a massive tax cut, I think this will help curb an excessive rise of long-term rates," he said.
Pro-fiscal spending parties remain popular, and this does add an element of uncertainty.
The Democratic Party for the People (DPP) won 17 seats on Sunday and now has 22. It has said that tax relief can be backed by issuing government bonds. The DPP hopes to temporarily lower the consumption tax rate on all products to 5% until real wages start rising again.
Sanseito, which significantly increased its presence by winning 14 seats, advocates eventually abolishing the consumption tax altogether, saying the government can issue bonds to finance the policy. Reiwa Shinsengumi and the Japanese Communist Party have also proposed scrapping the consumption tax.
Nippon Ishin no Kai plans to reduce the 8% tax on food to zero for two years.