New Party in Japan Fights Major Tax Increase

Bloomberg: Ozawa Forms New Japan Opposition Party in Challenge to Noda
FT: Noda Must Pull Off More Than a Tax Rise
FT: Ozawa Breaks with Japan’s Ruling DPJ
Reuters: Japan Eyes Political Shakeup After Ozawa Forms New Party
RTT: Japan's Ozawa Forms New Party Named With DPJ's Campaign Slogan
WSJ: Japan's Ozawa Forms New Party

On July 11, veteran Japanese politician Ichiro Ozawa unveiled Japan’s newest political party, Kokumin no Seikatsu ga Daiichi (“People’s Livelihoods First”).With the new party, Ozawa plans to overturn Prime Minister Yoshihiko Noda’s proposal to double the nation’s consumption tax--a tax on the purchase of goods and services. The new tax hike bill proposed by Prime Minister Noda will increase the current sales tax from 5% to 8% by the year 2014 and to 10% in 2015. Ozawa claims the proposed tax hike goes against the 2009 election promise made by the Prime Minister and his Democratic Party of Japan (DPJ) to not increase the tax for at least four years. Yet, Prime Minister Noda insists that the tax increase is essential to confronting Japan’s high debt, which was 211.7% of gross domestic product (GDP) at the end of 2011, as well as to fund rising social welfare costs of Japan.

Political opponents of the Prime Minister argue that the tax increase will discourage consumption because it will make it more expensive for consumers to purchase goods and services and thus fail to increase government revenue. Critics also point out that Japan has low economic growth and an aging population that is generating soaring social security bills, so an increase in taxes will only slow the expansion of the debt mountain. The aging population means more people are drawing social security and depending on the government for income. Since economic growth is slow, the government is able to take in less money and does not have enough money to cover all of the social security costs and the country must take on more debt to cover such costs. The International Monetary Fund (IMF) stated that Japan needs to raise the consumption tax to at least 15% to begin lowering their debt. Even with Noda’s planned tax increase, Japan’s total outstanding government debt is still set to hit a whopping 292% of gross domestic product (GDP) by April 2016.

Ozawa’s new party has 49 upper-and-lower house members, all who left the ruling Democratic Party of Japan in protest against the tax hike bill. The party also has 37 lower-house members, who voted against the tax bill in rebellion of the Democratic Party of Japan before defecting from the party. Japan is a democratic constitutional monarchy where the power of the Emperor is very limited and mostly symbolic. The power of the executive branch lies with the Prime Minister. The Japanese legislature, called the Kokkai or Diet, consists of an upper house and a lower house, like the United States legislature. The lower house is the Shugi-in or the House of Representatives and it has 480 seats with members serving a four-year term. The upper house is the Sangi-in or House of Councillors and it has 242 seats with members serving a 6-year term. Generally, decisions come from a majority vote in both houses.

The new party aims to seriously threaten the Prime Minister’s power, although public opinion polls show that voters have low expectations for Ozawa’s party. The party will be the third largest in the lower house and it has the potential to remove the Prime Minister if the party joins with other opposition parties. The defection of some members to Ozawa’s party caused the DPJ’s majority to slip to 250 in the 480-member lower house, allowing the party to keep its majority by only 11 seats. This small majority means the DPJ and the Prime Minister could have trouble gaining a majority vote as they try to push their agendas on other divisive issues like the multi-nation Trans Pacific Trade Partnership free trade agreement—a regional trade pact that Japan is awaiting approval to enter into negotiations regarding.

Although the tax hike bill already passed the lower house, Ozawa has promised to block the bill when it comes to a vote in the upper house next month. However, the DPJ and the Liberal Democratic Party have agreed to pass the tax hike bill through the upper chamber, regardless of Ozawa’s opposition. To combat such opposition, Ozawa will likely reach out to other discontented DPJ members to try to delay, if not halt, the passing of the tax hike bill. Conversely, some critics and political opponents of Ozawa say that other parties will be reluctant to cooperate too closely with him given his history of creating and breaking up political alliances. Therefore, even with Ozawa’s new party it still appears as though the DPJ will have enough support and will retain enough power to pass their tax hike in the upcoming upper house vote.