Prime Minister Naoto Kan’s plan to raise the consumption tax and help save the country from a possible Greece-type fiscal crisis has been effectively sidelined by the ruling bloc’s loss of its Upper House majority in Sunday’s election.

The election has created a divided Diet, with the Democratic Party of Japan in control of the Lower House and the opposition camp holding the Upper House.

Expected strife within the DPJ will also make it tough for the government to pursue its political agenda, including Kan’s hope to eventually raise the 5 percent consumption tax, economists said Monday.

“Put simply, (the direction of the tax hike discussion) is now unclear. Before such discussion, dealing with the political situation and divided Diet will of course be the priority for lawmakers,” said Hiromichi Shirakawa, chief economist at Credit Suisse Securities Ltd in Japan.

Kyohei Morita, chief economist at Barclays Capital Japan Ltd., also said the political situation will affect any talk of a consumption tax hike, especially now that the DPJ needs more coalition numbers and faces a presidential election in September. He said things will not move forward until that poll is held.

Morita speculated that Kan, who heads the DPJ, will probably face a rival candidate close to former DPJ President Ichiro Ozawa, or even Ozawa himself. And Ozawa opposes the tax hike.

“If someone close to Ozawa became president, the consumption tax discussion itself would effectively disappear,” Morita said.

During the campaign, Kan stressed the need to debate a consumption tax hike, arguing something must be done to reduce the snowballing national debt. But Ozawa and lawmakers close to him have opposed a consumption tax hike, fearing a voter backlash.

“The first hurdle is the DPJ’s presidential election, and the second hurdle is the new framework of the ruling coalition. The discussion of the consumption tax hike will not get on a firm track until those hurdles are overcome,” Morita said.

On Sunday night, Kan said he will continue on as prime minister and reiterated his call for all parties in the Diet to talk about the consumption tax.

But it may be difficult to get the Liberal Democratic Party, which won the most seats in Sunday’s election, to join the discussion.

Although the LDP also called for a hike, LDP leader Sadakazu Tanigaki said the party won’t sit down with the DPJ unless the ruling party withdraws the costly campaign pledges it made for the Lower House election in 2009.

Shirakawa of Credit Suisse said it is possible the LDP may talk with the DPJ, but any move to raise the tax will probably not occur until the next Lower House election, when the issue would be the focal point of the campaign.

The DPJ’s loss Sunday has proven again that talk of a tax hike before an election is politically self-destructive.

“It is not just the case in Japan. But politicians, whether they are in the ruling or opposition camps, (face the) trauma (of losing) an election if they talk about a tax hike,” Kan himself said in April.

However, he also said that if the government spends money wisely, it should be possible to raise the tax without hindering economic growth. Thus what matters for politicians is how to win over voters, he said.

While Kan apparently failed, economists said the DPJ’s loss doesn’t necessarily mean the people have flat out rejected a tax hike.

They said Kan may have just been ill-prepared to start the discussion, noting there have been few debates over tax reform specifics during election campaigns, while voter attention often focused only on the fact that Kan abruptly started talking about a tax hike and then flip-flopped on the issue later.

If lawmakers propose detailed plans, “I think they can possibly gain the understanding of the people . . . so I don’t think politicians should be all that pessimistic about the tax hike and an election,” Shirakawa said.

Akitsugu Bando, senior economist at Okasan Securities Co., said a rational, persuasive plan for a tax hike is the only way to gain public acceptance.

But he also warned that the DPJ-led government may not have enough time to handle the tax issue, given the expected difficulty from the divided Diet.

Because the next Lower House election could be held anytime within the next three years, politicians will have an even tougher time pushing a tax hike, he said.

“If it takes too much time, the next Lower House election will come, and lawmakers will begin to distance themselves from tax hike talks,” Bando said.

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