Media  Global Economy  2012.06.22

Policy Issues for Japan's Economy in 2012: TPP and Consumption Tax

English translated version of "Business Prospect" on NHK Radio Channel 1 on January 24, 2012

1. What economic issues in Japan do you think are politically important in 2012?

  Along with the post-earthquake restoration, there are several issues of political importance in 2012. They include the Trans-Pacific Partnership free-trade agreement ("TPP"), financial reform, and the consumption tax. No one disputes that the areas hit by the earthquake should be reconstructed, although there may be controversy over how to implement the reconstruction. To the contrary, there is fundamental conflict among the politicians and the citizens in Japan whether Japan should participate in the TPP negotiations and whether the consumption tax should be raised.

  It is unfortunate for Japanese voters that the members of the two main political parties themselves, the Liberal Democratic Party (LDP) and the Democratic Party of Japan (DPJ), take conflicting positions on these issues within their own party. In a political party, the members are supposed to share common views and opinions on the main policy issues. But even though Japan has a two-party system, Japanese voters find themselves unsure of which party to vote for because the parties' policy positions are unclear. Once an LDP Diet member stated in his election campaign that he was against the introduction of the consumption tax even though it was one of the LDP's campaign pledges. Japan's voters may face the same situation this year.

2. What is the exact situation concerning the TPP in Japan at the moment ?

  Prime Minister Yoshihiko Noda announced in November 2011 that "Japan would enter negotiations for joining the TPP accord." But opponents claimed that he simply meant to begin preliminary discussion of the subject, and that no decision had been made to participate in the TPP agreement. The confusion was caused by his muddled words, which were deliberately chosen in their finalizing stage to save face for those on both sides of the issue. However, it is obvious that sooner or later Japan will have to decide whether it is going to join the TPP or not.

  The LDP's first priority seems to be dissolving the parliament to bring about a general election. But even if an election takes place, the LDP will find it difficult to resolve its own intra-party disagreements over whether or not to support joining the TPP.

3. What about the consumption tax?

  Prime Minister Noda overcame his colleagues' resistance to raising the consumption tax while compromising on the timing of implementation. However, he faced such strong opposition that ten Diet members left the DPJ.

  The LDP had called for raising the consumption tax in the Upper House election in 2010. But now the LDP is accusing the DPJ of violating its campaign pledge by moving to raise the consumption tax, and the party is insisting that the DPJ's public mandate should be tested in a general election. What if Noda and the DPJ took up the LDP's challenge and went into a general election campaigning under a pledge to raise the consumption tax? In that case both parties would be basing their platforms on a pledge to raise the consumption tax, making it difficult for voters to choose a party based on its policies.

  I would think that the TPP issue and the raising of the consumption tax are interrelated.

4. Why do you think they are interrelated?

  The political party newly formed by the politicians who left the DPJ has adopted its policy to oppose both participation in the TPP and the increase of the consumption tax. This reflects the position of the opposition faction within the DPJ. They are concerned about losing in the next election if the DPJ commits to the TPP participation and the consumption-tax hike.

  Some people often mention the "regressive" nature of consumption tax as one of the reasons why they are against it. If food prices increase due to a hike of the consumption tax, households with lower income are more adversely affected because their expenditure ratio for food is higher. One of the reasons for objection to the TPP is that farmers are badly affected by the price decrease of agricultural products that can result when import duties on agricultural products are lifted.

  These arguments are inconsistent. Agricultural products are foodstuffs. Those who are in the opposition on both of these issues are against an increase of food prices that could result from a higher consumption tax, while at the same time they oppose the decrease of food prices that can be realized by the TPP.

  The current 5% consumption tax generates tax revenue of 13 trillion yen. High tariffs on agricultural products make them more expensive in Japan than they are overseas, resulting in extra costs for Japanese consumers amounting to 4 trillion yen. In all, the Japanese people pay 17 trillion yen, the equivalent of a 6.6% consumption tax. Even if the consumption tax were raised to 10%, joining the TPP would not lead to higher food prices, and the real tax increase would be just 3.4%, the difference between the current real rate of 6.6% and the proposed 10% rate.

  From the consumers' viewpoint, the best way would be to join the TPP and not to increase the consumption tax. But that would hinder Japan's financial rehabilitation. At the moment, Japan has accumulated public debt twice the size of its GDP, and the debt continues to grow. Under these conditions, it is not impossible to imagine a scenario in which the fall of prices for government bonds lead to higher interest rates, resulting in a serious deterioration of Japan's economy.

  Opponents of the consumption-tax hike also argue that it would have a negative impact on the economy. But if we wait for the economy to recover before making any reforms, the government's financial situation will never improve. And even if the economy gets better, discussions of a tax increase would be deferred again for fear of harming the economy. As a result, tax increases can never be realized. We should note in this respect that participation in the TPP will have positive effects on the economy and compensate for any negative effects of a tax increase.

  I would think that an increase of the consumption tax and participation in the TPP are necessary in order to prevent a financial collapse, achieve economic growth, and take care of low-income consumers. Compensation for farmers can be properly implemented by reviewing aspects of the current agricultural budget such as the individual household income support system. No additional sources of revenue are required. We should stop our bad habit of passing indebtedness on to the next generation now.

(This article is translated from the Japanese transcript of Mr. Yamashita's speech in the "Business Prospect" session of the radio program "First in the Morning News" broadcast by NHK Radio Channel1 on January 24, 2012.)