Japan renews int’l pledge to address fiscal plight

FOCUS: Japan renews int’l pledge to address fiscal plight

WASHINGTON, Sept. 24 Kyodo

Japanese Finance Minister Sadakazu Tanigaki renewed his resolve before world financial policymakers that Japan will push ahead with fiscal reforms as part of global efforts to address current account imbalances.

Tanigaki made the pledge during a series of meetings over the weekend in Washington, where he met with U.S. Treasury Secretary John Snow and other financial leaders for the first time since Japan’s ruling coalition won a fresh mandate to promote structural reforms following its landslide victory in the Sept. 11 general election.

The election gave the coalition a more than two-thirds majority in the House of Representatives, giving Tanigaki and his boss, Prime Minister Junichiro Koizumi, more power to push through politically sensitive spending cuts and tax increases aimed at rehabilitating debt-ridden state finances.

”Fiscal consolidation remains the top priority on the government’s policy agenda, and steady implementation of fiscal structural reform efforts will continue, with a view toward achieving a primary surplus for the combined central and local governments in the early 2010s,” Tanigaki said at a two-day annual gathering of the World Bank and the International Monetary Fund that began Saturday.

During a meeting Friday, Snow congratulated Tanigaki on the election victory by Japan’s Liberal Democratic Party and its junior coalition partner, the New Komeito party, and was anxious to hear what kind of reforms that Tanigaki, a reelected senior LDP lawmaker, will undertake.

Referring to the election victory, Snow ”expressed his view that it sent a strong signal from the Japanese people that the program of reforms outlined by Prime Minister Koizumi should continue,” according to Tony Fratto, acting assistant secretary of the U.S. Treasury Department.

Tanigaki told Snow about his determination to strengthen fiscal reforms on both the revenue and expenditure fronts because Japan’s finances are ”in a very severe situation,” according to a Japanese Finance Ministry official.

Specifically, Tanigaki said he is considering revamping Japan’s tax structure with a plan to eliminate the 1999 fixed-rate income tax cuts at the national and local levels and to raise the consumption tax rate from the current 5 percent, the official said.

This surprised reporters traveling with him to Washington because Tanigaki referred to specific tax hikes without presenting specific measures to cut government spending, leaving them with the impression that the minister made an international promise to raise certain taxes as a way of addressing Japan’s fiscal plight.

In fact, the elimination of the tax break, which Japan’s Finance Ministry wants to achieve in fiscal 2006, would generate 3.3 trillion yen a year in tax revenues, equivalent to an effective tax hike of that amount, according to Japanese Finance Ministry officials.

Japan has the worst fiscal situation among major industrialized nations and it shows little sign of improving as the rapid aging of the nation’s population is causing debt-servicing costs and social security outlays to snowball.

On the expenditure side, Tanigaki said he is calling for ”drastic spending cuts with no sacred cows” when the Finance Ministry compiles the state budget for fiscal 2006, a draft of which will be unveiled in December.

Tanigaki told reporters that he wants to curb ”inevitable” rises in social security costs, especially medical spending, due to the rapidly aging population and declining birth rate.

But economists said Tanigaki’s failure to present specific targets for cutting government spending — which taxpayers believe must come first before considering tax hikes — makes these calls seem lukewarm. Similarly, the LDP failed to do so during the election campaigns leading up to the Sept. 11 vote.

In contrast, the main opposition Democratic Party of Japan presented some specific spending cut targets during the campaign, which many economists preferred over the LDP’s vague calls for expenditure reforms.

The DPJ said that a DPJ administration would trim spending by a net 10 trillion yen in the three years from fiscal 2005 as part of efforts to achieve a primary budget surplus — by which tax revenues exceed expenditures minus debt-servicing costs — in eight years.

Now is the time for Tanigaki to explain to the public why he considers raising taxes without drastically slashing spending on key outlays, such as social security, major public works projects and local tax grants, and slimming down the bureaucracy. Koizumi and other leaders in Japan’s ruling coalition also have the same responsibility.

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