Japan Government Approves Plan to Double Sales Tax

Yen coins and banknotes
Image Source | Getty Images
Yen coins and banknotes

Japan's government approved on Friday a plan to gradually double the 5 percent sales tax to pay for welfare spending in an admission that it failed to woo the opposition to cooperate on the draft.

Prime Minister Yoshihiko Noda, who needs opposition votes to pass bills in a divided parliament, had put cabinet approval on hold trying to lobby other parties to discuss the proposal before its submission to parliament. But opposition lawmakers refused as they try to stymie Noda's agenda and force an early election.

The government plans to submit the tax hike bill next month, but passage is no more certain than it was when the government drafted the plan late last year, leaving an important first step in rebuilding public finances in doubt.

"It became clear that it would be to difficult to get opposition parties to cooperate in advance, so the cabinet approved the tax and welfare reform plan," Japanese Finance Minister Jun Azumi said on Friday.

"One area that we need to discuss with the opposition is how to offset the burden of higher taxes on people with low income."

Late last year the ruling Democratic Party agreed a timetable on rises in the sales tax, with the first rise not coming until April 2014, six months later than originally planned.

The timetable, revised to appease lawmakers who are reluctant to take the unpopular step of raising taxes, will push up the 5 percent sales tax to 8 percent in April 2014 and then to 10 percent in October 2015.

The government will start work on writing the bills to change the sales tax and to reform some welfare spending, Azumi said. The ruling Democratic Party is likely to continue to reach out to opposition lawmakers for their cooperation, but it's uncertain how they'll respond.

Even if the sales tax rises to 10 percent, this would only be a first step in lowering Japan's public debt burden, which is the worst among industrialized nations and about twice the size of its $5 trillion economy.