EDITORIAL: DPJ candidates must recognize the need of tax increase

Many candidates in the Democratic Party of Japan's leadership election will likely criticize the government's tax increase plan.

The administration of outgoing Prime Minister Naoto Kan has decided on a special tax hike to finance measures to rebuild areas devastated by the March 11 earthquake and tsunami and also on a gradual increase in the consumption tax rate as part of integrated social security and tax reform.

The special tax hike for post-disaster reconstruction, in particular, is unpopular among the prospective candidates in the election to choose Kan's successor.

The two supplementary budgets that have already passed the Diet provide a total of 6 trillion yen ($78 billion) for efforts to rebuild ravaged communities.

In addition, the government will sell state assets and issue special bonds to raise the estimated 13 trillion yen needed over the next five years.

The new debt will be paid back with money raised through a special tax increase over several years, according to the government's plan.

Many of the politicians gearing up for the DPJ election, however, are calling for a delay in the tax raise, arguing the step would deliver an additional blow to the nation's faltering economy.

It is vital for policymakers to keep this risk in mind. But they should also be aware of the serious negative effects that would be produced by delaying the tax increase.

This summer, the United States and Europe plunged into a debt crisis. Financial markets became uneasy about the ability of the governments to pay back their debts. The credit rating of U.S. government bonds was downgraded for the first time ever.

Europe failed to make quick and effective policy responses to the sovereign debt crises in some southern European countries, raising concerns that the crises may spread to financial institutions that hold bonds issued by the governments of these countries.

Investors have been piling into the yen as a relatively safe store of value at the moment. With its public debt load approaching 200 percent of gross domestic product, however, Japan is in worse fiscal shape than Western nations.

The nation's private-sector savings, which have been tapped to make sure that government bonds are mostly purchased at home, are bound to dwindle as the population grows older.

These realities are behind the government's decision to finance the recovery from the disaster with a special tax hike.

In a related development, Moody's Investors Service, one of the major U.S. credit ratings agencies, on Aug. 24 lowered Japan's sovereign credit rating.

Explaining reasons for the downgrade, Moody's warned that frequent leadership changes in Japan are undermining policy consistency, and the March disaster has made it even more difficult for the government to achieve its targets for paring down the budget deficit.

Reconstruction projects will go into full gear in disaster-hit areas in the coming months.

The third extra budget, expected to be enacted this fall, will pump-prime the economy, setting the stage for some economic growth starting next fiscal year.

Implementing the proposed tax increase without missing out on this opportunity would be the best policy choice both from a fiscal viewpoint and in terms of the effects of the action on the economy.

Of course, the government should postpone the tax hike if the world falls into a financial crisis like the one triggered by the collapse of U.S. investment bank Lehman Brothers in autumn 2008.

It is obvious that the government should make all possible efforts to minimize the tax increase. It should try to stimulate economic growth by promoting deregulation and seeking to reach economic cooperation agreements with Japan's major trade partners. It should also do its utmost to identify and eliminate unnecessary programs.

But the fiscal reality is that all such efforts would not be enough to allow the government to go without raising taxes.

The government-appointed panel of experts to develop plans for Japan's recovery from the disaster stressed that all generations living today should join hands and share the burden so that it won't be shifted to future generations.

All the candidates for the DPJ leadership election should take this message to heart.

The Asahi Shimbun, Aug. 25