New Prime Minister Yoshihiko Noda has made clear that tax increases advocated by his predecessor will be one of his first orders of business.
New Prime Minister Yoshihiko Noda has made clear that tax increases advocated by his predecessor will be one of his first orders of business.
Increases in both income tax and the consumption tax rate are in the cards.
The additional tax revenue will be used to fund rebuilding from the March 11 Great East Japan Earthquake and to reform social security systems.
Noda's administration, meantime, is feverishly trying to formulate substantial "growth strategies" to expand the scale of the economy.
For the time being, the government will concentrate on compiling the third supplementary budget plan of this fiscal year, which will include programs to attain full-scale recovery in affected areas of northeastern Japan.
As for the third supplementary budget plan, Noda said in a news conference held after he was elected new president of the ruling Democratic Party of Japan: "First of all, we need to decide ways to procure financial resources. Then, we want to start the (budget compilation) work so that we can obtain support from the opposition parties."
Analysts interpreted his comments as a clear sign that tax increases are inevitable and imminent.
According to the basic reconstruction policies decided by the previous Kan administration, reconstruction projects will require 13 trillion yen ($169 billion) in the coming five years, including those earmarked in the first and second supplementary budget plans of this fiscal year.
To procure funds for most of the 13 trillion yen as well as resources for state-sponsored pension programs, the government plans to issue "reconstruction bonds" worth 12.5 trillion yen.
The problem is how to repay the debts.
Following the policies of the Kan administration, Noda plans to cut expenditures by reviewing public pledges listed in the ruling party's manifesto, such as child allowances. He also plans to sell state-owned assets.
In addition to those measures, Noda emphasized the necessity of tax increases in a joint news conference of candidates for the party's presidential election held Aug. 27.
"We have no choice but to increase taxes," Noda said.
Noda is considering raising income taxes by a fixed rate. The government's Tax Commission will offer its suggestions on how to go about it early in September.
The main opposition Liberal Democratic Party has proposed raising income and corporate taxes to cover the costs for recovery efforts in the Tohoku region.
There are high hopes that with the change of prime minister, negotiations between the ruling and opposition parties will go smoothly. As a result, the tax increase will likely be implemented in the next fiscal year.
There are also fears that if the government rushes ahead with tax increases, it could jeopardize economic recovery.
Noda said in the Aug. 27 news conference: "If the economy does not grow, we will not be able to reconstruct the government's fiscal situation. If we do not reconstruct the government's fiscal situation, we will not be able to achieve economic growth."
For the moment, Noda's growth strategies remain vague.
He has said that he will promote new industries in the fields of "Green Innovation" (Environment and energy) and "Life Innovation" (Health and medical services).
But they are essentially just copies of policies decided by the Kan administration in June last year.
Exports of essential infrastructure, such as nuclear power plants, formed a basic pillar of that policy. Given the scale of the nuclear disaster in Fukushima Prefecture, Noda will have to take another look at that policy.
The Kan administration also delayed making a decision on whether to take part in talks on a Trans-Pacific Partnership (TPP) agreement aimed at promoting freer trade.
On this issue, Noda will have to make a decision by November when summit meetings of the Asia-Pacific Economic Cooperation (APEC) forum will be held.