Japan to finalize tax reform plan

Published: 17/06/2011 at 03:32 PM

• Online news: Asia

Japan will next week finalize a plan to double its five percent sales tax as part of efforts to cover rising social security costs and rein in its massive debt, according to Prime Minister Naoto Kan.

Part of Tokyo's Ginza shopping district is seen in this file photo. Japan will next week finalize a plan to double its five percent sales tax as part of efforts to cover rising social security costs and rein in its massive debt, according to Prime Minister Naoto Kan.

A panel of government and ruling coalition officials on Friday devised a revised draft for tax reform, proposing to raise the tax to 10 percent in stages by March 2016.

"I want you to make last-minute efforts to finalize the reform plan on Monday," Kan told the meeting of ministers and lawmakers, Kyodo news reported.

The Kan administration aims to formally endorse the draft on Monday, but faces opposition from members of the ruling Democratic Party of Japan and coalition partner the People's New Party, on worries over the impact of tax increases on Japan's fragile economy.

The tax rise is aimed at plugging a shortfall and funding the growing costs of providing for the nation's greying population -- two factors driving Japan's need to borrow.

The draft said the government would increase grants to local governments once the sales tax is raised.

Japan's debt is the industrialised world's biggest at around 200 percent of GDP after years of pump-priming measures by governments trying in vain to arrest the economy's long decline.

Markets and organisations such as credit-rating agencies and the International Monetary Fund are scrutinising Japan's efforts to prevent its fiscal problems from hurting its debt holders or the global economy.

On Thursday, the IMF reiterated its call on Japan to raise the sales tax, calling on the world's number-three economy to increase the tax rate to 15 percent starting next year.

Ratings agency Standard & Poor's in January cut Japan's credit rating for the first time since 2002, accusing the government of lacking a "coherent strategy" to ease the highest debt of any industrialised nation.

In doing so S&P cited Japan's high budget deficit, persistent deflation and an ageing society as factors pressuring the centre-left government's finances, but added Japan's outlook was stable given its "strong" external balance sheet.

The government has been able to fund its growing fiscal gap by raising money in the domestic market, with around 95 percent of the country's huge debt held domestically via banks and pension schemes.

Japan's ability to finance its debt is therefore seen as sustainable for now, but analysts warn that this will change as the population ages and dips into savings to spend in retirement.