Japan government proposes tax hikes, reconstruction

TOKYO: Japan should raise taxes to fund rebuilding after the March 11 earthquake and tsunami, the government's advisory panel said on Saturday, but it is unclear how binding its recommendations will be given the political impasse over the fate of Prime Minister Naoto Kan.

The panel's proposal provides the basis for spending on reconstruction of Japan's northeast devastated by the magnitude 9.0 quake and a deadly tsunami, which is widely expected to top 10 trillion yen ($124 billion).

Kan's government aims to submit to parliament a small extra budget next month in addition to 4 trillion yen emergency spending approved in May to cope with the world's costliest natural disaster. On Friday it updated its estimate of the direct material damage from the disaster at 16.9 trillion yen -- the lower end of an initial 16-25 trillion estimate.

"We must secure revenue sources for reconstruction by sharing the burden among the present generation," the panel said in the proposal submitted to Kan.

However, it is far from clear whether any of the proposals will take shape any time soon given that Kan is on his way out and the opposition, which controls the parliament's upper house is blocking legislation to speed up Kan's departure.

Kan, criticised for acting not decisively enough in response to the disaster and an unfolding nuclear crisis, said earlier this month he would resign, but kept the timing vague, angering the opposition and critics within his own party.

The reconstruction panel calls for a temporary increase in corporate, personal income and sales taxes, which together account for about 80 percent of state tax revenues to redeem reconstruction bonds. The panel said tax rises were needed to maintain market confidence in Japan's public finances saddled public debt twice the size of its $5 trillion economy

Investors are keen to know how much of the reconstruction bill Tokyo will shoulder and how it will finance it, while ratings agencies warn the heavily-indebted government of credit downgrade.

The recommendations come several days after a government plan to double the 5 percent sales tax to finance bulging welfare costs met stiff opposition from lawmakers fearing it could scupper fragile economic recovery and alienate voters.

The reconstruction panel did not detail which taxes should be raised and by how much or give estimates of needed expenditure or proposed maturities of reconstruction bonds.

It urged the government to raise the proportion of tax receipts allocated to local governments and help quake-hit regions carry out reconstruction projects, it said.

The panel, made of scholars, local governors, business executives and a Buddhist priest, advocated creating special zones in quake-hit areas to promote land development and local industries through deregulation and other measures.

Creation of special zones would help speed up reconstruction as administrative applications for land use would be simplified. It would also empower local governments and businesses to carry out their own projects and create new industries, it said.

The panel also called for promotion of renewable energy such as solar, wind, biomass, hydro and geothermal power generation, citing geographical advantages of Japan's northeast coasts.

Promotion of renewable energy will contribute to creation of jobs and making up for job losses caused by the nuclear disaster in Fukushima following the earthquake and tsunami, it said.

"We strongly urge the government take this proposal earnestly and carry it out sincerely and swiftly," it said. Kan, Japan's fifth premier in five years, survived a no-confidence vote this month after promising critics in his Democratic Party of Japan (DPJ) he would quit over his handling of the March disaster, but declined to say when.

Copyright Reuters, 2011