Consumption tax cut unlikely after Sunday election

Ahead of Japan's general election on Sunday, some opposition parties are calling for cutting or abolishing the politically sensitive consumption tax to entice voters feeling the pinch from price hikes, but the proposals appear too good to be true.

The ruling and main opposition parties have been reluctant to change the tax rate from the current 8 or 10 percent, arguing that the revenue needed to maintain the social security system and public services in such fields as medical, child and nursing care.

The parties advocating for consumption tax reductions have also been criticized by political experts as irresponsible, as the measure, whether temporary or not, is likely to further weaken Japan's already fragile fiscal health, the worst among leading developed economies.

"It is very unrealistic to cut or scrap the consumption tax," a former House of Representatives lawmaker said, adding, "Populist political parties and groups have pitched tax reductions in every national election to garner attention from voters."

During the official campaign for the upcoming lower house election, discussions have been intensifying among party leaders, including Prime Minister Shigeru Ishiba, on how to mitigate the negative impact of higher prices outpacing wage growth on consumers.

Real wages declined for a record 26th straight month in May with a 1.4 percent fall, as consumer prices have been on an upward trend with the weaker yen driving up import costs. Resource-poor Japan is heavily dependent on imports to meet its food and energy needs.

Taro Yamamoto, a former TV personality who heads the anti-establishment political party Reiwa Shinsengumi, has expressed eagerness to eliminate the consumption tax amid mounting public frustration over rising food and commodity prices.

Among other opposition parties, the right-leaning Japan Innovation Party said it would set the consumption tax at a flat 8 percent for all items, while the Japanese Communist Party has proposed immediately lowering the taxation rate to 5 percent.

Takahide Kiuchi, executive economist at Nomura Research Institute, estimated that a 2-percentage-point consumption tax cut would boost Japan's real gross domestic product by 0.4 percentage point and the abolition of the taxation by 1.99 percentage points.

But Ishiba, who became the premier on Oct 1 after being elected president of the ruling Liberal Democratic Party late last month, has described the consumption tax as a vital resource for social security, dismissing the possibility of decreasing the rate.

Yoshihiko Noda, leader of the largest opposition Constitutional Democratic Party of Japan, has also argued that the consumption tax revenues should be used to fund health care, childrearing, education and other basic services.

The decision to raise the consumption tax rate in two stages -- from 5 percent to 8 percent and then to 10 percent for many items -- was made during Noda's nearly 16-month tenure as prime minister through December 2012, when the predecessor of the CDPJ was in power.

In 2014, the late Prime Minister Shinzo Abe, Noda's successor, implemented the first round of the tax hike, followed by the second in 2019 under the LDP-led government despite lingering concerns that the moves would weigh on economic growth.

The consumption tax hike a decade ago, aimed at covering swelling social security costs for the country's aging population, was the first since 1997, when the rate was lifted to 5 percent from the initial 3 percent introduced in 1989.

Yamamoto has lambasted Noda, who has made it clear that he has no intention of carrying out any consumption tax reduction, saying, "The culprit who decided to raise the rate and collapsed the Japanese economy cannot now pledge to lower it."

He further insisted that the consumption tax hikes have prevented domestic demand from expanding. Japan's economy contracted by 0.4 percent in real terms in 2014 and shrank by 0.8 percent in 2019, a year before the COVID-19 pandemic further hampered growth.

In a stump speech in October, Yamamoto said, "Japan is the only nation stupid enough to raise consumption taxes when the economy is in a bad state," adding, "We will take drastic steps to increase the amount of money that each individual has available to spend."

Many analysts, however, have adopted a cautious stance on cutting the consumption tax rate hastily, given that they believe the taxation will continue to support the pension and universal care systems, as claimed by Ishiba and Noda.

In addition, they warned that if vote-seeking tax reductions erode confidence in Japan's fiscal discipline, interest rates could spike and a surge in fund-raising costs would undermine the global competitiveness of companies, dealing a harsh blow to people's livlihoods.

The Kansai Economic Federation, a business lobby in western Japan, said in a statement, "In order to avoid such a situation, it is necessary for the government to build a sound financial structure with an appropriate sense of urgency based on rational grounds."

Kiuchi, a former board member of the Bank of Japan, echoed the view, saying that lowering the consumption tax rate would help shore up the economy in the short term, but the revision could also have significant adverse effects.

"Each party should discuss economic policies, while carefully explaining how to secure the financial resources," he added.