Japan PM considers tax hike to meet quake costs

Written by Reuters | Tokyo | Updated: Mar 30 2011, 09:25am hrs
Japan does not rule out any sources of funding relief and reconstruction after the devastating earthquake and tsunami, including a tax increase or dropping a plan to cut corporate tax, Prime Minister Naoto Kan said on Tuesday.

Kans government, still juggling delivering aid to the worst-hit areas with a protracted battle to contain the worlds worst nuclear crisis in 25 years, must also decide how to pay for Japans biggest rebuilding effort since World War II.

Kan said that more than one spending package may be needed for rebuilding, and all revenue options will be debated. Deputy finance minister Fumihiko Igarashi on Monday had said that the government may scrap a planned 5 percentage points reduction in company tax rates, and the head of the partys fiscal committee last week advocated an increase in sales tax.

An opinion poll published on Sunday showed more than two-thirds of the Japanese public would support an extra tax to fund rebuilding efforts. Kan told parliament he was not considering a tax rise at the moment, but signalled that it was among the options the government would consider.

However, increasing taxes would risk deepening the hit to economic growth. A tax increase will likely dampen personal consumption when household sentiment has already cooled, said Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting Company in Tokyo.

He also said that if the government totally calls off a corporate tax cut, not temporarily abandons it, it could accelerate the risk of the hollowing out of Japan as manufacturers shift operations abroad.

On the other hand, Japan's top business lobby this week gave the government the green light to drop the plan.

I don't mind if the government skips cutting the corporate tax rate, Hiromasa Yonekura, chairman of the Japan Business Federation, said on Monday. Instead, I want the government to move swiftly in its recovery efforts.

To raise about 5 trillion yen a year for the reconstruction, Ikkou Nakatsuka, the deputy chairman of the ruling Democratic Party of Japans tax committee, has suggested increasing the sales tax from 5% to 7%.

It would be the first increase since 1997, after which the economy fell into a recession and the then ruling Liberal Democratic Party lost an election.

The government may find it more attractive to raise tax to finance rebuilding than borrowing more given dire public finances, said Seiji Adachi, senior economist at Deutsche Securities.

But I think tax hikes would backfire as they put additional burdens on companies and consumers on top of damages brought to their sentiment and activity.