IMF Backs Japanese Prime Minister on Tax Reform

July 15, 2010 Taxation in Japan

Asia21_026Japanese taxpayers could experience a significant increase to the national Sales Tax rate in the near future, after the International Monetary Fund called for fiscal reforms.

Japan’s political climate has been turbulent recently following the Prime Minister’s Sales Tax rate hike proposal. Naoto Kan claimed that a doubling of the current 5 percent Sales Tax rate would be an ideal step in addressing the nation’s ballooning debts, which have reached 218 percent of GDP. The tax issue was seen as a significant reason behind Naoto Kan’s political party suffering a defeat at the recent Japan Upper House elections. Naoto Kan readily admitted that while a significant portion of taxpayers agreed with the proposed action, he had not done an adequate job in explaining its necessity, and subsequently lost credibility with voters.

According to an IMF report, released June 14th, Japan’s public debt could escalate to 250 percent of GDP by 2030. The nation’s financial situation requires quick fiscal consolidation. A portion of the necessary fiscal adjustment will materialize from the upcoming expiry of Japan’s fiscal stimulus measures; however, the economy’s limited room for expenditure cuts means that further adjustments will need to take the form of “additional revenue measures”.

The (IMF) has recommended for fiscal reforms in Japan to “…begin next year [2011] centered around a gradual increase in the consumption tax.” Elaborating, the report stated that introducing a new Sales Tax rate of 15 percent in 2011 will generate revenues of approximately 5 percent of GDP per annum. The report added urgency to the suggestion, saying that the debt crisis in Europe has raised “uncertainty” surrounding Japan’s economy. Political analysts are poised to follow Naoto Kan’s handling of the new information, as he has made it clear he will continue to pursue a tax rate increase. However, Japan’s voters have historically been wary about tax rate increase of any magnitude, especially as significant as suggested by the IMF.

Photo by International Monetary Fund