Japan's lower house approves doubling sales tax

Associated Press
Japanese Prime Minister Yoshihiko Noda reacts during the plenary session of the lower house of Parliament in Tokyo, Tuesday, June 26, 2012. Noda made a final plea for unity on a tax hike vote Tuesday that has divided his ruling party and could weaken his hold on power. Noda told Parliament the sales tax hike and other measures are needed to bolster Japan's economy and reduce public debt. (AP Photo/Koji Sasahara)
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Japanese Prime Minister Yoshihiko Noda reacts during the plenary session of the lower house of Parliament …

TOKYO (AP) — Japan's lower house voted Tuesday to double the country's sales tax to 10 percent over three years in a bid to rein in a bulging national deficit as an aging population burdens the nation's social security system.

The vote, however, may have weakened Prime Minister Yoshihiko Noda's grip on power as the measure faced strong opposition from a group within the ruling party led by power broker Ichiro Ozawa that believes the tax hike is premature and will further weaken the economy. Ozawa and his supporters have threatened to bolt the party over the tax issue.

The bill passed easily by a vote of 363-96, with support coming from the two biggest opposition parties. The tax bill still must pass the less powerful upper house to become law, which is expected.

It calls for raising the sales tax from 5 percent to 8 percent in 2014, and then to 10 percent in 2015.

Noda, who has been in power only since last September, has said the tax hike is needed to reduce Japan's bulging national debt, which is more than twice its gross domestic product. He has made the tax move the centerpiece of his efforts to tackle Japan's structural woes.

Finance Minister Jun Azumi said he hoped the vote would send a message to the world that Japan is dealing with its economic problems. "I think this shows the international community that although we had been criticized as indecisive, we are taking action," he said.

Japan was hit hard by last year's devastating earthquake and tsunami but has been sputtering for years with a stagnant economy and under one of the largest public debt burdens in the developed world. The country's aging population, meanwhile, has put a strain on the social security and tax systems, with Japanese aged 65 and older now making up about a quarter of the nation's population — a figure projected to rise to 40 percent by 2050.

"This reform is not just for our generation, but for our future," Noda declared before the vote.

But even Noda's government projects the step will take only a modest bite out of Japan's deficit. The Cabinet Office forecasts that doubling the sales tax will boost revenues by 13.5 trillion yen ($170 billion) annually by 2015. Japan currently runs a deficit of about 45 trillion yen ($563 billion) a year.

Some economists warn that the tax hike will end up undermining Japan's economy by weakening consumer demand at a time when wages are stagnant and people are already holding back on spending. Key auto and electronics exporters, meanwhile, have been battered by a strong yen and intensifying competition from Asian rivals.

While last year's tsunami disaster has made many Japanese more willing to make sacrifices to help their country recover, they are concerned over how the higher taxes will affect their personal finances.

"The tax hike will bring about another headwind to the economy, which is weaker consumption," said Hiromichi Shirakawa, Credit Suisse's chief Japan economist. Shirakawa argued that the tax hike will end up dragging on economic growth and erode income taxes and corporate taxes, thus worsening Japan's debt burden over time. He said that instead, the government should focus on ways to cut public spending and bolster the economy, and then raise the sales tax.

"In 10 years' time, we may see a more disastrous fiscal situation," Shirakawa warned.

The rebellion within the ruling Democratic Party poses a headache for Noda and raises the possibility of a party split, which would make it difficult for Noda to reach his party goals — and perhaps even force him to call general elections.

Party veteran Ozawa, who has often criticized Noda and controls a bloc of lawmakers in the ruling Democratic Party, has suggested he may leave the party and take as many lawmakers as he can with him to form a new one. If 54 or more lawmakers join Ozawa, Noda's party would lose its majority in the lower house of parliament altogether and could be forced to call general elections.

Fifty-seven Democratic Party of Japan members voted against the tax hike, according to a tally by public broadcaster NHK.

"The majority of the lawmakers in our party have broken their promises to the nation by supporting this bill," said Shozo Azuma, a DPJ lawmaker and a supporter of Ozawa. "We are ready to quit the party." But he stopped short of saying they would quit and instead suggested the bloc would meet soon to discuss their next move.

Azumi, the finance minister, pointed out that the bill received wide support from lawmakers, with nearly three-quarters of them approving it. Only a majority was needed for the bill to clear the lower house.

Azuma Koshiishi, DPJ secretary general, said the fact that more than 50 members of his own party voted against the bill was "disappointing" and that he and Noda together would consider possible penalties for them "under party rules."

"It was a clear demonstration of their views, and we take it very seriously," he said.

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Associated Press writers Eric Talmadge and Mari Yamaguchi contributed to this report.

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