Lawmakers in Japan's ruling Democratic Party agreed on Wednesday to push the government to water down a planned sales tax due to worries about the economy, even as inaction raises the risk of a sovereign rating downgrade. The agreement effectively undermines the government's commitment to double the sales tax to 10 percent by the 2015 fiscal year to fund rising social security costs and try to reduce the country's large public debt.
The government, rating agencies, the International Monetary Fund and many economists argue that higher taxes are necessary to prevent rising social security costs from blowing an even greater hole in Japan's finances. The country is already saddled with debt twice the size of the economy.
"We've reached the point where we have to cross the first hurdle," Koichiro Gemba, policy chief for the Democratic Party, told lawmakers meeting on tax and social security reform. "I will try to get as much leeway on the tax hike timing as possible."
Because of resistance within its own power base, the government has already missed a self-imposed June 20 deadline to agree on the tax increase, so additional delays or a weakened plan would damage its credibility further. Moody's Investors Service has already warned that missing last week's deadline was a bad omen for Japan's debt rating, yet another headache for Prime Minister Naoto Kan, Japan's fifth premier in as many years.
Kan faces rebels in his party and a hostile opposition that is using its control of parliament's upper house to block legislation, hoping to force him to resign. "The chance of a downgrade is increasing, and it seems the government is losing its ability to chart a course that repairs public finances," said Takahide Kiuchi, chief economist for Japan at Nomura Securities. Economists also warn that even in its original form, the plan was not ambitious enough, with changes to social security actually leading to a rise in costs rather than savings necessary to reduce debt.
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