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Economy

What's missing in Japan's consumption tax debate

Global race to reduce corporate tax will force Tokyo to rely on other levies

An aerial view in Tokyo: The country will increasingly rely on consumption tax, experts say.   © Getty Images

TOKYO -- Japan's consumption tax went up to 10% from 8% on Tuesday after two postponements prompted by fears of a chilling impact on consumer spending and the economy

The Prime Minister Shinzo Abe's government is going all-out to stem the expected economic slowdown. But experts tell Nikkei that a more important task is for the government to spell out to the public that the tax hike's goal is to sustain Japan's social security system.

"The government is doing too much," said Hiroshi Yoshikawa, president of Rissho University in Tokyo. "It has adopted lower rates on certain items, rolled out a point program for cashless payments and is offering free preschool.

"This is all because they want to avoid an economic downturn, but the tax debate is too tilted toward economic performance," he said. "What is missing is a debate on the role of the consumption tax and why it is necessary."

Many of the government measures stem from the trauma linked to the past two consumption tax hikes, which were followed by economic downturns and delivered a blow to the politicians in power.

But Yoshikawa rejects the argument that the tax increases were the direct cause of the slowdowns.

"Of course, taxes sway the economy," he said. When Prime Minister Ryutaro Hashimoto raised the consumption tax to 5% in 1997, a severe downturn followed.

But "that summer, there was the Asian currency crisis stemming from Thailand," Yoshikawa said. "In the fall, there was a lending crisis headlined by the bankruptcy of Yamaichi Securities. When you look back, what impacted the economy the most are the financial crises" rather than the tax increase.

When Japan's consumption tax was next raised in 2014, consumer spending slumped again.

"It is true that the tax increases shrink income and that could push down consumption levels," Yoshikawa said. "But the fact that consumption struggled to recover to previous levels is not related to the tax hike. The real issue behind that is the slow gain in wages and concerns about social security."

Those concerns about social security reveal the importance of the consumption tax, the professor said.

"As Japan ages, financing social security will become even tougher, and the main pillar to support that will be consumption tax," he said. "Politicians must explain that key role."

Yoshikawa, a former economic adviser to Prime Minister Junichiro Koizumi, also said that the consumption tax needed to be discussed from a global business angle.

"In the age of globalism, countries will be competing to attract companies with lower corporate tax rates," he said.

A heavier consumption tax will be inevitable from this standpoint, Yoshikawa said.

"The 10% consumption tax rate is only a milestone," he said. "We should detach the argument from the day-to-day economy and think about the sustainability of our social security system and fiscal policies."

Kazumasa Oguro, professor of economics at Hosei University in Tokyo, called for government spending reforms to accompany the consumption tax increase.

Social security outlays in Japan's budget exceed 34 trillion yen ($315 billion) and will grow as the population ages. But raising the consumption tax rate takes time.

"The consumption tax rate started at 3% in 1989 and has taken 30 years to raise just 7 percentage points," Oguro said. "Numerous European countries have rates of 20% or more. The system is not fiscally sustainable under current conditions."

The Hosei professor urged a different approach to funding social security.

"One estimate puts social security payouts in 2040 -- for the pension program as well as medical and nursing care -- at 60% higher than 2018 levels," he warned. "To reform social security, we need a permanent committee that can tackle issues across many ministries and agencies."

Japan's social security system is based on a report issued in 1950 by a government advisory council created under the direction of the postwar General Headquarters, Oguro said, referring to the allied occupation.

"There is a need once again for the will to bring government interests together," he said.

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