FOCUS: Japan PM Takaichi Unwavering on Consumption Tax Cut

Tokyo, July 30 (Jiji Press)–Japanese Prime Minister Sanae Takaichi has displayed unwavering commitment to reducing the consumption tax rate to 1 pct for food for two years beginning next April as a measure to fight inflation. On Thursday, the prime minister instructed her ruling Liberal Democratic Party to hold discussions to reach a consensus over the tax reduction so that the government can make a decision on the step in early August. In talks with reporters later in the day, Takaichi formally announced the plan to implement the tax cut. Takaichi’s bullishness on the policy reflects her determination to fulfill the LDP’s pledge to cut the tax rate in the general election in February, which resulted in a historic victory for the party. Meanwhile, some said the prime minister appears to be downplaying concerns over fiscal discipline and the risk of a surge in long-term interest rates. She sought to share responsibility with political parties for making an important political decision to reduce the rate of a core tax, by leaving detailed discussions to the suprapartisan National Council on Social Security. But this strategy did not work as opposition parties raised objections to the tax cut in favor of an early introduction of a cash benefit program. Common Awareness of Issue “All parties share the awareness of the need to swiftly reduce the burden on the public,” Takaichi said Wednesday after the national council compiled an interim report listing both the tax cut plan and the benefits scheme earlier in the day. The prime minister has championed a consumption tax cut, calling it her long-standing desire even though many deficit hawks in the LDP such as deputy party chief Taro Aso expressed caution over the measure. The party vowed in the February general election to accelerate a study on the possibility of reducing the consumption tax rate to zero for food. In the process of mulling the possible tax cut, some proposed reducing the tax rate on food to 1 pct while providing benefits equivalent to the 1 pct tax, effectively lowering the tax rate to zero. This idea is aimed at shortening the time required to update cash register systems. Takaichi was initially reluctant to greenlight the 1 pct plan, telling people around her that it was “not great.” Even when many senior officials of an economy-related government agency attempted to persuade her, she stuck to the zero tax rate, claiming that this would be possible if they tried. On Tuesday, the prime minister met with Aso, who is seen as a key figure propping up her administration, and LDP Secretary-General Shunichi Suzuki, a member of an intraparty faction led by Aso. According to informed sources, Takaichi pushed through the de facto zero tax rate although Aso asked her to reconsider the size of the reduction. The Takaichi cabinet’s approval rating fell in many public opinion polls in the late phase of the latest parliamentary session that ended Saturday, apparently due in part to her heavy-handed management of her administration. Many in the ruling and opposition parties believe that the tide has turned on the Takaichi administration, which had maintained high approval ratings since its launch last October. “I will do my best to realize my pledge,” the prime minister said at a press conference Monday, apparently sensing danger from her slipping popularity. “If even commonsense actions cannot be carried out, the people’s trust in politics will be lost in an instant.” Little Impact from Tax Cut According to an LDP source, the ruling bloc, also including the Japan Innovation Party, had sought to obtain cooperation from opposition parties through the national council as the coalition was short of a majority in both chambers of parliament. But after the ruling camp won a majority in the House of Representatives, the lower chamber, in the February election, the council’s role became unclear. In the general election, all major opposition parties except Team Mirai campaigned on reducing the consumption tax. However, the Centrist Reform Alliance, the Constitutional Democratic Party of Japan and Komeito called for the early introduction of a benefit program instead of a tax cut during working-level talks at the council. Even the Democratic Party for the People, which has gained seats in parliament after leading discussions on a consumption tax cut, started to argue that reducing resident tax and providing benefits would be faster and more effective. The opposition’s about-face likely reflects the fact that Team Mirai, which called for keeping the consumption tax rate unchanged, clinched large gains in the general election, in addition to concerns about rising long-term interest rates. Takaichi has said that the government plans to cover some 5 trillion yen in annual costs to realize the effective zero consumption tax rate for food by reviewing existing subsidies and special tax breaks as well as tapping nontax revenue, rather than issuing deficit-covering bonds. However, it is unclear whether this can really be done. If Japan’s fiscal policy loses the market’s confidence, it could accelerate the yen’s weakening and inflation. In addition to fiscal concerns, the government needs to draw up support measures for industries likely to be affected by the tax cut, such as farmers and the dining sector. “Now that the tax cut decision has been delayed to this extent, it won’t have much political impact,” a senior LDP official said. “The public may not be able to feel the effects of the tax cut.” END [Copyright The Jiji Press, Ltd.]