Takaichi Goes Forward to Consumption Tax Cut

Prime Minister Sanae Takaichi announced her idea to the Liberal Democratic Party to introduce temporary consumption tax rate for foods at 1 percent for two years starting from next April. Although she had received a report from the National Council on Social Security, Takaichi decided to ignore opinion of the opposition parties that was against consumption tax cut. Takaichi believes that her policy will work to mitigate impacts of price inflation, but it has many problems. 

Consumption tax cut was in Takaichi’s policy platform for February Lower House election. It was designed as a measure for the period before the government would introduce refundable tax credit. Although Takaichi hoped to receive a report from the national council that would recommend consumption tax cut to 1 percent, the opposition parties did not agree with the consumption tax cut, supporting direct subsidies for households. The council wrapped up its report with options of both consumption tax cut and subsidy.

 

Takaichi did not like it. Saying that she would pay respect to the effort of the council, she instructed the LDP to design how to introduce consumption tax cut by next spring, turning the option of subsidy down. Japan Communist Party and Sanseito was excluded from the council from the beginning. As seen in the revision of Imperial House Law, Takaichi and the LDP failed in formulating a unanimous opinion beyond the party lines. The opposition parties do not know for what purpose the council was established.

 

The greatest concern on Takaichi’s consumption tax cut is how to find a fiscal resource for the policy. The tax cut reduces national revenue by 5 trillion yen a year. The recommendation of the national council does not clearly show where that 5 trillion yen will come from. Although Takaichi administration expects to squeeze that money out of reviewing all the spendings of the government and taxation system. While emphasizing the stance not to rely on new issuance of governmental bonds, detailed and viable fiscal resource has not presented.

 

That fiscal ambiguity has been causing depreciation of Japanese yen and interest rate hike of long-term bonds. As Takaichi did not send any sign to reconsider her conviction on consumption tax cut, Japanese yen depreciated to 163 yen against a dollar, marking the lowest record in these four decades. Long-term bond’s interest also shows decades high. Although yen’s value abruptly rose to 157 yen on July 31st, with suspicion of intervention by Ministry of Finance and Bank of Japan, it immediately came back to 160s.

 

Opposition parties are doubtful about that the government can implement its precondition that the consumption tax rate will be returned to 8 percent two years later. Getting the rate back from 1 percent to 8 percent will effectively work as a tax increase, which will make an extremely unpopular policy. Former prime minister Shinzo Abe postponed consumption tax rate hike from 8 percent to 10 twice. It is also unpopular for the LDP, as seen in Yoko Obuchi’s resignation as a core member of LDP Tax System Commission. But no one can stop Takaichi so far.

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