Prime Minister Yasuo Fukuda brought in a new economic team Friday to show his commitment to reconstruct debt-ridden finances through higher taxes, but economists warn it will not be easy for the government to raise taxes when consumer sentiment is already on the skids.
The embattled Fukuda replaced his top finance and economic ministers as part of a Cabinet reshuffle in a bid to boost his low popularity.
Veteran Liberal Democratic Party politician Kaoru Yosano, 69, a reformist and an advocate of raising the consumption tax, returns to his old post of economic and fiscal policy minister he held under Prime Minister Junichiro Koizumi. He is also a supporter of an independent central bank.
Bunmei Ibuki, 70, exited the LDP secretary general post to become the new finance minister. The ex-Finance Ministry bureaucrat is also well-versed in economic policies.
Their appointments come at a time when the ruling bloc is divided over whether to promote economic growth to boost tax revenues, or rein in public debts and find other ways to raise money, such as increasing the consumption tax, to fund ballooning social security costs for the aging population.
“By appointing Yosano, Fukuda sent a clear message that the government will raise the consumption tax,” said Taro Saito, a senior economist at NLI Research Institute in Tokyo. Fukuda at least showed the direction he wants to take after he has been criticized for lacking a clear economic and fiscal policy message, he added.
But Saito said Yosano’s appointment may accelerate speculation of an early consumption tax hike and may hurt consumer sentiment, which has already been battered by rising food and energy prices. It may also add to downward pressure on the stock market, he said.
Saito said he will keep his eye on Yosano to see how hard he pushes for a sales tax hike in his public comments.
Hidehiko Fujii, chief economist at Japan Research Institute in Tokyo, also complimented Fukuda’s efforts to show his commitment to tighter spending and higher taxes.
“Ibuki is a former Finance Ministry bureaucrat and he also prefers raising taxes, as Yasano does. The two appointments positively show that the policy will be to try to raise taxes and restore fiscal health,” Fujii said.
However, he warned that raising the consumption tax is not an easy task.
“Yes, Fukuda showed his commitment for financial reconstruction, but the question is whether they can put it into practice ahead of a looming election. Raising the tax in an election year is impossible,” Fujii said.
A general election must be held by September 2009 at the latest and speculation is rife that it will come sooner.
Kenichi Kawasaki, an economist at Lehman Brothers in Tokyo, agrees.
“The market has already taken into consideration that the new government cannot (raise the tax) for the time being. So, there is no impact on the market,” he said.
Fukuda said in June a consumption tax hike will be considered over the next two to three years.
“The timing should be good for the government to raise the tax in two or three years, as the economy will be in an expansion phase,” Kawasaki said.
The national debt is expected to amount to ¥778 trillion by the end of this fiscal year next March, about 150 percent of gross domestic product, the worst level among major industrialized economies.
The government has a self-imposed goal of achieving a surplus in the so-called primary balance in the budgets for both central and local governments in fiscal 2011 as part of efforts to reconstruct debt-ridden finances.
A primary balance is achieved when revenues equal spending excluding debt sales and interest payments.
However, the 2011 goal will probably be missed, according to government calculations.
On the selection of Seiko Noda for the new post of consumer affairs state minister, Saito of NLI Research said she will have an impact on policy because she is a politician who has successfully attracted voters with clear messages on various issues.
It is also a sign that Fukuda will place emphasis on siding with consumers by creating the new post after the country has paid little attention to consumer issues during its postwar economic growth, he said.