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Japan's prime minister takes economic action, but risks popularity with his party and his people

Prime Minister Yoshihiko Noda won parliament's backing for a controversial rise in sales tax. Noda insists higher taxes are for the best, but rebellious members of his party disagree.

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Prime minister Noda has said that a tax hike is essential if Japan is to rein in its huge public debt and pay for rising welfare costs. (Toshifumi Kitamura/AFP/Getty Images)

TOKYO — Japan's prime minister, Yoshihiko Noda, has made raising taxes to tackle the country's debt woes the cornerstone of his economic policy. This week, he duly won parliament's backing for a controversial rise in sales tax. Yet the measure could sink his administration, and has cast doubt on Japan's commitment to fiscal house-cleaning.

Noda was not in celebratory mood when he appeared on TV after Tuesday's vote to address the future of his fractious ruling party. Hours earlier, 57 rebels from his Democratic Party of Japan (DPJ) voted against a bill that would double the tax to 10 percent over the next three years.

The bill had passed the lower house by 363 votes to 96 with the help of the main opposition Liberal Democratic Party (LDP), which has demanded an early election in return for their cooperation.

The immediate challenge to Noda, however, comes from the disaffected ranks of the DPJ, less than 10 months after he became Japan's sixth prime minister in as many years.

If more than 54 of the rebels, led by Noda's nemesis, Ichiro Ozawa, decide to leave the party, the DPJ would lose its lower house majority, leaving the prime minister vulnerable to a no-confidence vote, and raising the prospect of an early election the DPJ is expected to lose.

Whether or not the Ozawa camp jumps ship remains to be seen. Tuesday night he said he would continue to pressure the government into ditching the tax rise before considering his future and that of dozens of younger DPJ lawmakers, many of whom owe their seats to his campaigning at the 2009 election.

Noda has said the tax hike is essential if Japan is to rein in its huge public debt and pay for rising welfare costs in a country where almost a quarter of the population is aged over 65; in less than 50 years, 40 percent of the population will be of retirement age.

Failure to tackle the deficit, he warns, would put the world's third-biggest economy at risk of a European-style debt crisis.

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"I want to pursue decisive politics that take action when it is necessary," Noda told a televised news conference after the vote. "The passage through the lower house is a big step in that direction."

At more than 200 percent of its $5 trillion dollar economy, Japan's debt is the largest of any industrial nation. Since more than 90 percent of its debt is held domestically, however, warnings that it could become the Asia-Pacific's equivalent to Greece smack of alarmism.

With the tax increase expected to pass through the upper house in August, Noda may have won the economic battle, only to find himself and his party on the losing side in the political war to come.

Ozawa says the tax hike will weaken consumption and represents a betrayal of the manifesto on which the party fought the last election. "This is a betrayal against the people, who would be within their rights to call us liars," Ozawa said after the vote, before vowing to frustrate the bills' passage through the upper house.

First, Noda must decide how, or if, to discipline his party opponents. A mere slap on the wrist will not be well received by those who remained loyal to the prime minister, while expulsion would dramatically hasten the DPJ's decline.

Koichi Nakano, a political science professor at Sophia University in Tokyo, says Ozawa's threats should be taken seriously. "I think it's more likely than not that he'll leave the party and take a sizable group, of perhaps more than 40 MPs, with him," he says. "Noda will either have to step down or call an election and be ousted by the voters. In either case, it seems highly unlikely that Noda will be able to stay on as prime minister until the end of the year."

Japan will almost certainly enter another period of political instability at a time when it hopes to reassure the rest of the world it is getting to grips with its deficit, which the Organization for Economic Cooperation and Development (OECD) predicts will reach 223 percent of GDP next year.

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Earlier this month, the International Monetary Fund (IMF) urged Japan to raise the sales tax to demonstrate its commitment to fiscal reform. "Passage of legislation to double the rate to 10 percent in stages by 2015 is crucial to demonstrate a commitment to fiscal reform and sustain investor confidence," the IMF said in a statement following its annual review of Japan's economy and economic policies.

In addition, the ratings agency Fitch Ratings cut Japan's credit rating last month, citing a lack of progress in coping with ballooning social security costs and describing the country's fiscal policy as "leisurely.

The tax reforms alone will not solve Japan's deficit headache. According to the government's forecasts, doubling the consumption tax will boost revenues by 13.5 trillion yen ($170 billion) a year by 2015; Japan's deficit is currently running at about 45 trillion yen ($564 billion) a year.

But the finance minister, Jun Azumi, said Tuesday's vote demonstrated that Japan was addressing its economic problems. "I think this shows the international community that although we have been criticized as indecisive, we are taking action," he said.

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The tax row has already hit Noda's ratings. According to a Kyodo News poll conducted after Tuesday's vote, public support for the cabinet has slipped below 30 percent.

Even if they punish the DPJ at the ballot box, Japan's voters will struggle to find a viable alternative, says Nakano. "The most likely scenario is that the DPJ will fall apart and lose power," he says. "The LDP has not regained the public's trust [since its defeat in 2009]. It has not even tried to do so, so it won't provide a reliable answer to Japan's social and economic ills either."

http://www.globalpost.com/dispatch/news/regions/asia-pacific/japan/120627/japan-noda-tax-raise-economy