The ruling Democratic Party of Japan will propose raising taxes and even having the central bank underwrite government bonds to cover the costs of rebuilding from the Great East Japan Earthquake.
The ruling Democratic Party of Japan will propose raising taxes and even having the central bank underwrite government bonds to cover the costs of rebuilding from the Great East Japan Earthquake.
A DPJ task force has drafted a basic law for recovery and reconstruction measures along with 17 related laws. The Cabinet of Prime Minister Naoto Kan plans to submit the bill for the basic law to the Diet in early May.
Immediate damage from the magnitude-9.0 earthquake and tsunami that struck March 11 alone is estimated at between 16 trillion yen ($190 billion) and 25 trillion yen.
That figure excludes the monetary fallout from the accident at the Fukushima No. 1 nuclear power plant caused by the quake and tsunami.
According to an outline of the draft basic law, the government will "consider" introducing new taxes, such as a special consumption tax, a special corporate tax and a "social solidarity" tax, as a primary source of revenue to fund recovery and reconstruction measures.
In the first two examples, tax rates would be raised for a certain period, with the increased revenue allocated exclusively for reconstruction.
If the 5-percent consumption tax is raised by 1 percentage point, an additional 2.5 trillion yen per year would flow into government coffers.
The DPJ task force says funds, goods and manpower would be mobilized over the five years after the basic law takes effect.
In the case of a social solidarity tax, the income tax rate would be raised by a certain percentage only for residents outside the quake-hit regions.
Yet the question remains whether the government can introduce new taxes at a time when the earthquake and unfolding nuclear crisis cloud the economic outlook.
Proposals to raise taxes to finance rebuilding from the 1995 Great Hanshin Earthquake eventually fell through.
The outline of the draft basic law includes a controversial proposal to have the Bank of Japan directly buy special government bonds for measures to rebuild infrastructure and support rehabilitation of quake victims.
The central bank underwrote government bonds before World War II to finance military expenditures and other outlays, which led to hyperinflation once the war was over.
The measure, criticized for undermining fiscal discipline, was subsequently banned in principle under law.
Still, DPJ policy planners fear that interest rates would spike if many of the proposed reconstruction bonds fail to find buyers.
Theoretically, the central bank can underwrite as many government bonds as needed by printing money. But putting more money in circulation could stoke inflation.
"It's a taboo that we should never resort to," said economic and fiscal policy minister Kaoru Yosano, a known fiscal hawk. "We would lose the trust of the world."
A senior Finance Ministry official also said the extraordinary measure would erode the credibility of the government debt and lift interest rates, foiling the DPJ's intentions.
If the BOJ underwrites government bonds, investors will take it as a sign that the government is not confident the bonds can find buyers on the market, the official said.
A DPJ panel headed by Secretary-General Katsuya Okada will soon propose the recovery and reconstruction legislation based on the task force proposals.
According to the draft, the government will consider buying up land left uninhabitable by the devastation wrought by the tsunami or radioactive contamination from the nuclear plant accident.
DPJ policy planners believe the state must buy such land plots to carry out city planning and zoning, designate areas where people are prohibited from living and help residents rebuild their lives.
The draft also calls for setting up a government office tasked with reconstruction and anti-disaster efforts.
The new office, to be overseen by the prime minister and headed by a Cabinet minister, would bring together public servants and private-sector experts in crisis management and other areas.