FOCUS: Japan’s Touchy Consumption Tax Faces First-Ever Cut

Tokyo, Aug. 2 (Jiji Press)–Since its introduction in 1989, Japan’s consumption tax has been raised three times and now accounts for about 30 pct of total national tax revenue, making it the nation’s largest core tax category. If implemented, Prime Minister Sanae Takaichi’s plan would mark the first-ever reduction in the tax’s history. The proposal would lower the tax rate on food purchased at stores, excluding restaurant meals, from 8 pct to 1 pct for two years starting next April, as part of measures to support households struggling with the rising cost of living. Historically, the consumption tax has been a political minefield for administrations involved in its introduction or subsequent increases. Often described as a “gateway to misfortune,” the tax has played a decisive role in shaping the political fortunes of prime ministers, many of whom suffered crushing election defeats or were forced to resign. Resignations, Abandonments The idea of introducing a consumption tax in Japan was first floated in 1979 under Prime Minister Masayoshi Ohira, whose administration adopted a policy calling for a “general consumption tax” as part of efforts to promote fiscal reconstruction. The proposal, however, triggered fierce public opposition. Although Ohira withdrew the plan, his ruling Liberal Democratic Party lost its majority in the House of Representatives, the powerful lower chamber of parliament, in the general election later that year. Prime Minister Yasuhiro Nakasone’s government also had to abandon an unpopular “sales tax” proposal in 1987. After these failed attempts, the administration of Prime Minister Noboru Takeshita succeeded in introducing a much-disputed consumption tax at a rate of 3 pct in April 1989. The move, however, caused his approval ratings to fall. Already under pressure from the Recruit stock-for-favors scandal, Takeshita was ultimately left with little choice but to resign. In 1994, Prime Minister Morihiro Hosokawa’s government abruptly announced a plan to replace the consumption tax with a 7 pct “national welfare tax.” The proposal quickly backfired, largely because of inadequate preparation and groundwork. Hosokawa was driven to withdraw it just a day and a half later. With his political momentum lost, he resigned three months later. In April 1997, the government of Prime Minister Ryutaro Hashimoto raised the consumption tax rate hike from 3 pct to 5 pct. The tax hike was later viewed as one of the key factors behind Japan’s economic downturn, along with the Asian financial crisis and the domestic financial industry turmoil that led to the collapse of Yamaichi Securities Co. In the 1998 triennial election for the House of Councillors, the upper chamber of parliament, the LDP suffered a crushing defeat, prompting Hashimoto to step down. After that, raising the consumption tax rate became politically taboo. Even Prime Minister Junichiro Koizumi, whose administration enjoyed high approval ratings, kept a tax hike off the agenda. In the 2009 Lower House election, the then Democratic Party of Japan seized power from the LDP-Komeito coalition after pledging not to raise the tax rate for four years. 3-Party Accord Still, a consumption tax hike re-emerged as a major political issue in 2010. Just before the Upper House election that year, Prime Minister Naoto Kan of the DPJ announced that he would consider raising the tax rate to 10 pct as part of efforts to put the fiscal house in order. The proposal, however, drew criticism as “half-baked,” and Kan’s party suffered a stinging defeat in the election. His successor, Prime Minister Yoshihiko Noda, advocated an integrated reform of the social security and tax systems. He submitted legislation to parliament to raise the consumption tax rate to 10 pct in two stages. Following a three-party agreement with the LDP and Komeito, both then in opposition, the legislation was enacted in August 2012. The DPJ was subsequently thrown into disarray, with anti-mainstream members, including Ichiro Ozawa, leaving the party en masse in protest against the tax hike. Under growing political pressure, Noda proceeded to dissolve the Lower House for a snap election, fulfilling his promise to do so “in the near future” in exchange for the three-party accord. The DPJ suffered a landslide defeat to the LDP and fell from power. Prime Minister Shinzo Abe of the LDP, who returned to power in December 2012, raised the consumption tax rate to 8 pct in April 2014 as scheduled. But after the hike triggered a slump in consumer spending, Abe twice postponed the second-stage increase to 10 pct, originally scheduled for October 2015, prioritizing efforts to pull Japan out of persistent deflation. The 10 pct rate was finally introduced in October 2019, alongside a reduced 8 pct rate for food items. Borne by a broad range of generations and relatively unaffected by economic fluctuations, the consumption tax serves as a stable source of revenue to help finance social security costs, including pensions, medical care, nursing care and measures to address the declining birthrate. Nevertheless, in reality, such costs have continued to swell as Japan’s population ages, and consumption tax revenue alone has proved insufficient to cover them. The gap has instead been filled through the issuance of deficit-covering government bonds. Yet despite these fiscal constraints, Takaichi is pressing ahead with a consumption tax cut–a step that even the late Abe, whom she looks up to as her political mentor, never advocated–and presenting it as nothing less than her “long-cherished ambition.” END [Copyright The Jiji Press, Ltd.]