Commentary: Don’t reopen the ‘demon gate’ debate in Japan

TOKYO: Japan is facing a changing world of tariffs, artificial intelligence, and a potentially existential threat to its number one export. Yet its approaching election seems set to be dominated by a rehash of a decades-old debate.

Consumption tax, first introduced in 1989 and raised over the years to its current maximum rate of 10 per cent, is shaping up to be the major theme of July’s upper house election – a poll that will determine the fate of embattled Prime Minister Shigeru Ishiba and his minority government.

With the public unhappy with persistent inflation, most recently in the form of a record surge in rice prices, Ishiba’s rivals are lining up with spurious proposals to cut the sales tax or eliminate it entirely. He has pushed back, arguing that Japan’s fiscal situation puts it in no position to reduce revenues. Japan’s “fiscal situation is undoubtedly extremely poor, worse than Greece’s,” he told parliament on Monday.

While the comparison is unwise, and helped to push up bond yields, it’s true that the country is in no position to be cutting taxes. Calls to do so should be ignored – Japan doesn’t have time to relitigate this staid discussion.

DEMON'S GATE

Arguments over the levy are so persistent that it’s long been described in media coverage as kimon, a phrase that literally translates as a “demon’s gate” – from the ancient superstition that entrances facing northeast are unlucky as they allow evil spirits to enter – and refers in this context to a sticky problem or potential landmine.

It has led to the collapse of governments and been blamed for triggering recessions.

The issue overshadowed almost the entirety of Shinzo Abe’s record-breaking premiership; and it so divided the now-defunct Democratic Party of Japan that opposition to the ruling party remains fragmented to this day, helping Ishiba’s Liberal Democratic Party stay in power despite widespread public dissatisfaction.

A recent survey found that more than 70 per cent of respondents want the tax to be scrapped or reduced. Ishiba’s decision to rule out a cut has given opposition politicians a chance to focus on the issue even more, with proposals to temporarily slash the levy on food to zero or reduce the entire tax to 5 per cent until the economy improves.

Ishiba’s internal rival Sanae Takaichi, who tops polls of who should be the next premier, has broken ranks, backing the idea of imposing less on food. Ishiba bears responsibility for reopening the demon’s gate, however: As US tariffs roiled markets earlier this year, reports said the government was considering the measure.

AN IRRESPONSIBLE AND UNSERIOUS DEBATE

Of course, Japan is far from the only place where sales tax or its equivalents are repeatedly discussed. Singapore’s move to raise its goods and services tax has been criticised for lifting inflation at a time when citizens were already feeling the pinch. Vietnam cut its value-added rate temporarily last year, which it may extend.

And President Donald Trump has criticised the VAT levied by many countries as a non-tariff barrier that hurts US exports. 

But in Tokyo, the debate is both irresponsible and deeply unserious. Opposition leader Yoshihiko Noda is making a temporary cut the core of his election manifesto. But he was the one who, in 2012, passed legislation raising the rate to 10 per cent in the first place.

Unlike most other countries, Japan has spent years trying desperately to stoke inflation. Now that it finally has some, the government must ensure things don’t fall back – which makes it unwise to implement moves that would, at least in headline terms, be deflationary. Leaders should also avoid reawakening another old debate – Japan’s considerable debt burden.

The tax is the largest contributor to Tokyo’s coffers, making up more than 30 per cent of revenues. While takings have increased in recent years as the economy has recovered and inflation has risen, Ishiba must still find funds for increased defence spending and the ever-rising cost of health care and other social security measures as the country ages.

Detractors say the consumption tax is a regressive measure that disproportionately penalises the poor and causes more harm to the economy than good. But there are plenty of arguments to the contrary, including that it’s both hard to avoid and easy to collect.

Most importantly, it’s on the books right now. By international levels, Japan’s rate is rather low. Future generations may well debate whether to raise it, though that is not something I would argue for now.

Policymakers must resist the temptation of populist proposals. The country has been crying out for a bold economic vision for years, ever since Abenomics ran out of steam. Let’s find some new ideas instead of rehashing the classics.