Hiking the consumption tax to finance social security is "unavoidable" because the government is scheduled to raise its portion of the funding in fiscal 2009, Fujio Mitarai, head the Japan Business Federation (Nippon Keidanren), said Thursday.
The chairman of Japan's most influential business lobby made the remark about the basic pension programs during a meeting between his executives and Finance Minister Fukushiro Nukaga at a Tokyo hotel.
Nukaga was reluctant to readily back a consumption tax hike beyond the current 5 percent and said the government is still trying to cut costs.
"Japan needs to secure stable revenues and we will work on drastic tax reforms, including the consumption tax," Nukaga was quoted as saying by a ministry official.
Mitarai also said two temporary tax breaks — one on capital gains from stocks and one on dividend income — should be extended "for the time being," the official said.
Investors are worried that abolishing the tax breaks, introduced in 2003 to rein in the faltering stock market, will negatively impact Japan's equity market at a time when global stock markets are undergoing a shakeout triggered by the U.S. subprime mortgage loan crisis.
Terminating the breaks, which would return the tax rates for both to 20 percent instead of the current 10 percent, would discourage households from shifting more of their assets into stocks and investment trusts, analysts say.
Japan's savings rate is on the rise and set a record-high average of ¥531.2 trillion in July, according to the Bank of Japan. Japanese banks offer the lowest interest rates in the industrialized world.
The break on capital gains is scheduled to end in December 2008, and the break on dividends in March 2009.