On January 4th the Prime Minister of Japan Yoshihiko Noda held a press conference to mark the start of the new year, saying that the biggest hurdle for Japan at the moment is addressing the country’s overwhelming levels of debt and reaching an agreement on the issue of increasing the rate of sales tax.

Yoshihiko Noda said that Japan can no longer to postpone implementing a raised rate for the national sales tax, and a new bill to hike the tax will be submitted to Parliament by the end of the current fiscal year in April. The Prime Minister maintained that the rate of the sales tax needs to be doubled to 10 percent by 2015, but indicate his willingness to negotiate with the opposition on how quickly the tax will rise over the period of the next few years.

Last week the ruling Democratic Party of Japan (DPJ) proposed raising the tax rate to 8 percent by April 2014 and to 10 percent in October 2015, but the suggestion was met with the strong protest from the opposition and some members of the DPJ, and has already been dropped. Nine politicians within the DPJ quit the party in protest of the proposal. The main opposition party of Japan, the Liberal Democratic Party, is calling for an election to be held prior to considering any changes to the rate of the sales tax.

The Prime Minister said that Japan also needs to take rapid action to address the country’s skyrocketing national debts. The government currently projects that the country’s net debts will reach JPY 1 quadrillion by the end of the current fiscal year.

The government of Japan also needs to find new streams of additional revenue to raise funds for Japan’s recovery and rebuilding following the series of natural disasters which struck the country in 2011.
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Months of political debate came to an end on November 24th when the Lower House of Parliament of Japan approved new legislation which paves the way for the government to hike some tax rates as a means of raising revenues to fund earthquake recovery programs.

The legislation allows the government to instate an increase to the country’s personal income tax rate, for a period of 25 years starting from 2013. The extra funds raised by the tax rate increase will be used exclusively to service the government’s sovereign debts. Prime Minister Yoshihiko Noda has repeatedly maintained that the government will not issue any significant amounts of extra bonds without first finding new revenue streams to address the resulting interest and servicing payments.

The newly passed legislation will also allow the government to temporarily reduce the country’s corporate income tax rate. The rate cut is aimed at boosting capital spending, and easing conditions for businesses suffering from the effects of waning domestic demand and a rising national currency.

Before any changes can be implemented, the new legislation still needs to be approved in the Upper House of Japan, where the national opposition holds a majority. Political analysts in Japan have said that the approval could come as early as next week, as both the ruling Democratic Party of Japan and the major opposition seem to have come to an agreement over the necessity for raised taxes. The exact rate at which both taxes will be changed has not yet been decided, and discussions will begin once the legislative change is approved.

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While speaking to the press on October 4th the senior vice finance minister of Japan Fumihiko Igarashi said that the Tax Commission of the Finance Ministry of Japan is considering several tax measures aimed at increase capital investment and economic growth in the country’s disaster struck regions.

In the Commission’s plans, the government would designate 220 municipal areas of Japan as being eligible to enjoy a set of updated tax rules, which are designed to directly increase capital investment and economic activity in these regions.

Under the proposed rules, businesses which are established in the chosen municipalities will receive tax credits equal to 10 percent of the annual salary of the workers hired. The enterprise will receive tax credits worth up to a maximum of 20 percent of their total corporate tax obligation. Businesses operating in the selected areas will also be eligible for tax credits on purchases of machinery and buildings.

Individual taxpayers will be granted a JPY 50 million tax credit if a local government body purchases their land or properties as part of a city planning or reconstruction project. Home owners who choose to repair their homes will be eligible for tax credits in proportion the amount they spend on home repairs.

In the coming weeks the Tax Commission is expected to further refine and expand its list of proposed tax changes, with the specific aim of confirming new measures to directly boost employment levels in the disaster struck areas of Japan.

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Throughout the weekend following the appointment of Yoshihiko Noda’s as the Prime Minister of Japan, the new leader said that he will soon set out to introduce a temporary increase to the country’s consumption tax rate, however Yoshihiko Noda has not yet revealed what rate he will seek to instate. In an interview conducted on September 4th the new Finance Minister of Japan Jun Azumi said that the Prime Minister will hold discussions with opposition parties and the Finance Ministry, and have a plan for a tax increase by the end of October.

Yoshihiko Noda has repeatedly advocated the necessity to raise consumption taxes in Japan, which are currently set at a rate 5 percent. He also highlighted the importance of lowering the country’s debt levels, and necessity of raising funds for a recovery from the recent spate of natural disasters in Japan. Over the weekend, the Prime Minister reiterated that these goals will be pursued and that there is no time to waste on the issue of taxation. He added that he was not simply looking to raise taxes as a means of closing the budget deficit, but is seeking to instate an increase as a genuine means to aid the country’s financial situation.

Some political and taxation analysts in Japan have speculated that the likelihood of an increase to the consumption rate is appearing more possible following the appointment of Yoshihiko Nado as the Prime Minister, and he will be more active in pursuing the new tax measure compared to his predecessor Naoto Kan.

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On June 20th Prime Minister Naoto Kan held a press conference in Tokyo, in which he revealed that a government appointed committee has failed to agree on the details tax and superannuation system reforms, putting an indefinite delay to any proposed tax changes.

The committee, which was chaired by the Prime Minister, discussed the feasibility of significantly increasing the country’s sales tax rate, in order to fund the government’s earthquake rebuilding efforts. The panel also intended to finalize plans for an overhaul to the national superannuation system. It was expected that on June 20th the committee would announce a timeline for doubling the 5 percent sales tax rate by mid-2016.

Naoto Kan revealed that there was still widespread disagreement regarding the proposed sales tax increase, which has proven to be a widely contentious issue throughout his time a Prime Minister. Several key members of the Japan’s ruling Democratic Party of Japan still opposed the plan, seeking promises that the tax would not rise until the country was in a more stable economic position. The Japanese government has already sought to assure international investors and credit rating agencies that the disagreement is regarding timing and details for the change, and the county will soon carry out the actions necessary to improve its economic standing.

Commenting on the potential for a quick resolution to the disagreement, Naoto Kan was pessimistic, saying that it is not clear when a final meeting will be held to agree on the country’s tax future.

Photo by Guillaume Paumier