A major battle may well have started between the office of Prime Minister Shinzo Abe and the Finance Ministry — the most powerful bureaucracy in Japan — as the deadline approaches for deciding whether to raise the consumption tax rate from the current 8 percent to 10 percent from Oct. 1, 2015, as provided by law, a veteran economist says.
The fight, he adds, could be the fiercest of its kind in Japan’s postwar history.
Abe has so far remained noncommittal, saying he will first wait for the release of updated statistics on the nation’s gross domestic product (GDP) for the July-September quarter and then make up his mind in early December, shortly before the government begins drafting the budget for fiscal 2015.
Following the consumption tax rate hike from 5 percent to 8 percent in April, the revised GDP for the April-June quarter contracted at an annualized rate of 7.1 percent, worse than the 6.9 percent drop following the devastating earthquake and tsunami of March 2011.
The drop was initially seen as a reaction to a shopping spree to beat the tax hike. Subsequently, however, the pace of economic recovery has remained slow amid sluggish consumer spending, giving rise to warnings against a further tax hike next fall.
Indeed, Chief Cabinet Secretary Yoshihide Suga is one of the most avid advocates of delaying the tax increase, even though he, as Abe’s right-hand man, officially maintains a noncommittal position. Suga has been quoted as saying that not raising the tax must be considered and that it would be unrealistic to raise the consumption tax two years in a row.
A similar view has been expressed by professor Etsuro Honda of Shizuoka University, one of Abe’s brains who serves as special adviser to the Cabinet. He has repeatedly said that the second tax hike would considerably cool consumer sentiment.
At least through the end of August, the prime minister’s office appeared to have the upper hand with its call for delaying or freezing another consumption tax hike. But the situation changed after Sadakazu Tanigaki replaced Shigeru Ishiba as secretary general of Abe’s ruling Liberal Democratic Party on Sept. 3 as part of a major reshuffle of the Cabinet and the LDP top brass.
In August 2012, Tanigaki, representing the LDP as its president, signed a tripartite agreement on social security and tax reform programs with then Prime Minister Yoshihiko Noda of the Democratic Party of Japan and Natsuo Yamaguchi, head of Komeito, now the junior partner in the LDP-led ruling coalition. (That paper called for, among other things, raising the consumption tax rate to 8 percent in April 2014 and to 10 percent in October 2015.)
After being named to the powerful LDP post by Abe, Tanigaki remained rather neutral on the tax hike issue for a while, but his attitude changed drastically after Sept. 12. On that night he conferred with principal proponents of raising the consumption tax rate, such as Noda, Yamaguchi, former Finance Minister and Noda mentor Hirohisa Fujii, and Eijiro Katsu, who was administrative vice finance minister when the tripartite accord was signed.
That day happened to fall on the same day of the month of the death of Prime Minister Masayoshi Ohira, who had advocated the introduction of a “general consumption tax” but died while in office on June 12, 1980. The meeting with tax-hike proponents was called by Hajime Morita, Ohira’s son-in-law and a former Lower House member.
Tanigaki became more vocal about the next tax hike after that meeting. When interviewed by TV Tokyo on Sept. 13, he said: “There are means of overcoming the risks arising out of the implementation of the tax increase. But it would be far more difficult to cope with the risks that might follow a decision not to raise the tax.”
One puzzling thing was that Abe and Tanigaki did not meet with each other for half a month after the latter’s appointment to the powerful party post, causing concerns that the two might be at odds with each other. As if to dispel those concerns, the two met Sept. 19, though only for 25 minutes.
Even more puzzling was a statement in a speech Abe gave to the Research Institute of Japan just before meeting Tanigaki, in which he said, “Everything I have done to date will come to naught if the tax increase causes the economy to take a turn for the worse and prevents tax revenues from rising.”
Abe added that he would start meeting with experts without waiting for the release of preliminary GDP figures for the July-September quarter (due Nov. 17) to hear their views on the advisability of raising the consumption tax again.
This has been interpreted as indicating that Abe has already started studying the possibility of delaying the tax hike, as the prospect for the July-September period is by no means bright.
Abe must be fully aware that no prime minister has ever raised the consumption tax rate twice during his tenure and that, without exception, the prime ministers who oversaw a consumption tax raise ended up having to leave office after losing in the next election.
Originally Abe was not eager to raise the tax rate even from 5 percent to 8 percent. He gave the go-ahead signal on Oct. 1, 2013, because any delay would have necessitated cumbersome paperwork to amend relevant laws and would have led to the risk of his having to face adversaries on the issue in his own party. He also had been blessed with a “tail wind,” as Japan succeeded in its bid to have Tokyo host the 2020 Summer Olympics. The International Olympic Committee decided for Tokyo on Sept. 7, 2013, in Buenos Aires.
A factor working in Abe’s favor this year was North Korea’s pledge to submit a first report by “late summer or early autumn” on Japanese citizens whom Pyongyang agents abducted decades ago. This came after officials of the two countries agreed in Beijing on July 1 that the North would conduct a thorough investigation of all Japanese in North Korea, including those abducted.
The North’s promise proved unrealistic. Chief Cabinet Secretary Suga told reporters on Sept. 19 that North Korea had given notice that the investigation was likely to take about a year, that the work was still in its early stage, and that Pyongyang had nothing yet to report to Tokyo. This is tantamount to the North’s postponing the fulfillment of its promise. If the North is allowed to stall, high expectations that the Abe administration would resolve the abduction issue could soon turn to disappointment.
History shows that a number of Cabinets have faltered following a reshuffle. Abe had set a new performance record for not replacing a single member of his Cabinet since coming to power in December 2012, but anomalous signs surfaced after the reshuffle on Sept. 3.
Noteworthy was Abe’s relations with Suga, who apparently had been kept in the dark for quite a while about Tanigaki’s appointment as LDP secretary general, according to Abe’s inner circle.
As another sign of faltering communication between the two, some critics point to their simultaneous absence from the prime minister’s office on Sept. 17. While Abe was visiting Fukushima, Suga was in Okinawa.
Following the latest reshuffle, the dominance of the prime minister’s office over the LDP has shown signs of weakening, especially with Toshihiro Nikai, known for astuteness, being appointed as chairman of the LDP General Council. Nikai has started to influence the LDP special headquarters for promotion of “regional revitalization,” which is Abe’s top policy agenda item.
While Abe seeks to attain this goal through a series of “structural reform” programs, Nikai places more importance on public works projects. This difference in approaches could trigger a tug of war between the two.
Signs of discord have also surfaced within the Upper House group of LDP members, where Mikio Aoki, the group’s former head, still exerts influence even after his “retirement” from politics.
In the runup to the September reshuffle, Abe offered a Cabinet post to Masashi Waki, then secretary general of the LDP Upper House group and known for being close to Aoki. Waki declined the offer apparently because he and Aoki differed with Abe on how to reform the Upper House election system. Waki was subsequently relieved of his post.
Aoki also was reportedly unhappy when Abe named Yuko Obuchi, daughter of the late former Prime Minister Keizo Obuchi, as the new minister of economy, trade and industry without consulting Aoki, who is said to view her appointment as doing more harm than good for her future political career.
A crucial point about the new personnel arrangement in the LDP Upper House group — following the dismissal of Waki — was the appointment of Hiromi Yoshida, a skilled politician and one of Aoki’s closest aides, as chairman of the group’s Diet Policy Committee. This was another indication of Aoki standing up to Abe. Yoshida is a direct political descendant of the late Prime Minister Noboru Takeshita, who introduced the consumption tax in 1989, and is inextricably linked to the Finance Ministry.
What has cropped up is a unified group that favors the new consumption tax hike and is ready to launch a counterattack against Abe. It encompasses the former Takeshita faction, the Kochikai faction — to which Tanigaki belonged — and the Finance Ministry.
While Abe is indebted to the Finance Ministry with his international pledge to lower the corporate tax, all government ministries, except the Ministry of Economy, Trade and Industry, are rallying behind the Finance Ministry for the consumption tax hike.
Till now, the Japanese political scene appears to have been dominated by one large political party, with the opposition camp composed of weak groups. But the internal division over whether to raise the consumption tax is causing the LDP’s understructure to shake.
This is an abridged translation of an article from the October issue of Sentaku, a monthly magazine covering Japanese political, social and economic issues.
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