Japan is pushing towards a radical reworking of its consumption tax as a way of boosting revenues as the country grapples with the cost of rebuilding after the March 11 quake and tsunami, a crippling deficits and rising debt which are being made worse by the costs of the country's rapid ageing.

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News of the proposed changes, which could be confirmed today, comes as the May trade surplus rose under the influence of the post March 11 hit to production.

The country's Parliament yesterday approved legislation setting up a reconstruction commission to oversee the rebuilding of the areas shattered by the March 11 quake and tsunami.

The Ministry of Finance said the trade deficit rose to 853.7 billion yen ($US10.6 billion) in May, as exports fell 10.3% from a year earlier, and imports rose by 12.3%. In April exports for the month fell 12.5% from the year-earlier period, while imports rose 8.9%.

The deficit was the widest since 2009 and the first May trade deficit since 1980.

Exports to China fell 8.1%, 15.1% to the US, 7% to Western Europe, 32% to the Middle East and to Australia they were down 7.7%.

Exports of cars and electrical components and other products were again lower than a year ago after they slumped in late March and April.

The deficit confirms that the economy remains weak, but industrial output, consumer confidence and car industry production are showing stronger signs of recovery.

Another quarter of negative growth is expected in the current quarter, but many analysts expect the economy will grow again from the July-September quarter.

Prime Minister Naota Kan is pushing the changes to the consumption tax (the same as our GST), despite opposition from within his own party and moves to get him retire that are being led by a combination of his own party and the opposition.

Mr Kan last week proposed raising the consumption tax in steps from the current 5% to 10% by fiscal 2015 to cover spiralling social security costs.

The increase is a part of an integrated reform of social security and taxes which are aimed at helping control the steady rise in deficit spending and the national debt which will worsen because of the impact of the reconstruction after March 11.

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The move is not without significant danger: the last time an increase in the tax happened in the late 1990s retail spending and consumption generally slowed and then fell, dragging the economy sharply lower. That increase saw the tax rise from 3% to 5%.

Now, sections of the governing Democratic Party warn that a tax increase, especially of this particular tax, during a period of weak economic activity will hamper efforts to recover from the natural disasters of March.

Others agree that the tax must be raised, but not until the economy is stronger.

With a national and local government debt of about $US11.2 trillion dollars, Mr Kan feels any delay in reform will adversely affect financial markets.

He was to put the reform plan to a meeting of Cabinet ministers and officials of the governing coalition last night and the results of that meeting were not available early this morning.

On Sunday night, Mr Kan refused to spell out the timing of his resignation during a meeting with senior Democratic Party of Japan officials.

This brawl has delayed the announcement of the tax changes, media reports this morning say.

The party officials argued that opposition parties will not cooperate in passing legislation needed to issue deficit-covering bonds unless Kan agrees to step down, effectively telling him to resign.

According to the Nikkei business newspaper, Mr Kan has insisted on securing enough days to pass the third supplementary budget, a move that could see him remain prime minister.

The political manoeuvring is further confirmation that many Japanese politicians do not see the dangers the economy faces, despite the emerging recovery.

Improving the revenue base for the government, especially when social security spending is rising because Japan is ageing rapidly (meaning higher health and welfare spending), would send a message to the financial markets and ratings agencies that the country is serious about reforming its finances.

Failure to move on the consumption tax and other reforms will see the country's credit rating cut (it is already on a warning from a couple of ratings groups) and the deficit and national debt continue rising, retarding the economic recovery.

Copyright Australasian Investment Review.
AIR publishes a weekly magazine. Subscriptions are free at www.aireview.com.au

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