Japan's government proposed on Friday tax hikes worth around $146 billion and selling stakes in a tobacco company and Tokyo's subway operator to help fund rebuilding from a devastating March earthquake and tsunami. The heavily-indebted government faces a balancing act to secure funding for Japan's biggest rebuilding effort since the aftermath of World War Two without further straining its finances or choking off a frail economic recovery.
Income, corporate and consumption tax increases were among the options a government tax panel said it had proposed. Rises in other taxes such as those on tobacco, alcohol and gasoline were also suggested as the government seeks to raise 11.2 trillion yen. To limit the tax burden, Tokyo is seeking to sell stakes in Japan Tobacco Inc and unlisted Tokyo Metro to fund rebuilding in areas devastated by the magnitude 9.0 quake and tsunami that killed 20,000 people and triggered the world's worst nuclear crisis since Chernobyl in 1986.
"It is by no means easy for politicians to ask the people to shoulder a tax burden," Finance Minister Jun Azumi told reporters earlier on Friday. "Since we are determined not to pass the debt to the next generation after such an unprecedented disaster, we have no choice but to ask for some burden on individuals and companies." The Cabinet Office estimates that the proposed tax hikes could knock as much as 0.24 percentage points off Japan's real GDP growth in the first year if they were implemented from the fiscal year that starts from next April.
In outlining its proposals, the government presented three options for tax increases for debate among ruling party officials from next week, before compiling a third extra budget to fund the rebuilding of the disaster-hit north-east. Tokyo has already passed two supplementary budgets worth a total of 6 trillion yen and plans to spend 13 trillion more over five years, with the bulk of the spending due to be covered by the next budget due some time next month.
The government is considering funding most of the third budget, expected to be worth around 11 trillion yen ($143 billion), with reconstruction bonds, a source close to the matter told Reuters on Thursday. Extra tax revenues would be used to redeem the maturing bonds over a period of up to 10 years, according to the proposals. The larger-than-expected bond issuance would add to a debt pile that is already double the size of Japan's $5 trillion economy, although so far there have been no signs of strain in the Japanese government bond market, which is dominated by domestic investors.
Benchmark 10-year bonds are currently yielding just 1 percent, compared with around 2 percent for US Treasuries of the same maturity Azumi said increases in income and corporate taxes would provide the bulk of reconstruction financing, while the government would seek other sources of financing to limit the tax burden.
The government has vowed to tap non-tax revenues of 3 trillion yen, but Azumi said he will try to seek a few more trillion yen of non-tax revenues. To achieve this end, Azumi said he would consider selling the state's share holdings in Japan Tobacco Tokyo Metro, calling them "leading options". The government holds stakes of 50 percent in Japan Tobacco and 53 percent in Tokyo Metro, valued at around 1.74 trillion yen and 175 billion yen respectively.
Japan Tobacco, the world's third-largest cigarette maker, has been lobbying the government for years to sell more of its stake. But to cut its stake in the company, the government would have to go through a time-consuming process to change a law that says it must hold half of the former state monopoly.
The Democratic Party has yet to form a consensus on funding strategies, with some arguing corporate tax, which the government has pledged to cut by 5 percentage points, should be left alone while others push increases in sales tax as a funding tool. The ruling party would then need to persuade a hostile opposition, which controls parliament's upper house, to agree on the tax plans. Tax hikes are hugely unpopular in Japan, although polls have shown the public is willing to accept temporary increases to pay for rebuilding from the disaster.
Since before the March disaster, the Democrat-led government has been seeking a cut in the corporate tax rate - one of the highest among industrialised countries at around 40 percent - in order to prevent a hollowing out of Japan's industry and encourage companies to invest in the country.
With a rising yen threatening to derail the economy's recovery from the recession triggered by the March disaster, a ruling party policy panel called for a creation of a fund that would deal with the impact as one of its recommendations for the third extra budget. The panel also called for tapping Japan's $1.2 trillion foreign reserves to support corporate fund-raising in view of growing concerns of financial market strains stemming from Europe's sovereign debt crisis.