JAPAN UPPER HOUSE ELECTION 2007 / Vote may affect tax reform, trade

UPPER HOUSE ELECTION 2007 / Vote may affect tax reform, spending cuts

Shigeki Kurokawa / Yomiuri Shimbun Staff Writer

The ruling camp's loss of House of Councillors majority in Sunday's election makes it likely the ruling coalition will be forced to alter its economic policy.
In the wake of the election, the government has a number of important items on its schedule before the end of the fiscal year in March, beginning with a decision on standards for the budgetary requests of ministries and agencies for fiscal 2008. To balance the goals of economic growth and fiscal reconstruction, the government and ruling parties had planned to tackle tasks that were postponed to after the election, such as taxation reforms.
But the election result has clouded the future of the reforms.
The government plans to compile the standards on initial budget requests for fiscal 2008 by around Aug. 10. The immediate focus of attention is whether the government can maintain its stance to persistently cut expenditures.
During the election campaign, voters paid attention to the severe situation of regional economies, an issue used by the opposition camp to attack the government and ruling parties.
It is possible the government will face increasingly strong demands for more public works spending as a measure to narrow economic gaps between large cities and provincial regions.
Starting with the fiscal 2002 budget under the Cabinet of then Prime Minister Junichiro Koizumi, the government's public works spending has declined by more than 3 percent annually for six years in a row.
Whether the budget request standards for next fiscal year clearly state that public works spending should be cut by at least 3 percent will be an indicator of the government's determination to pursue fiscal reconstruction.
On an NHK news program aired Sunday night, Abe indicated his intention to start deliberations about taxation reforms, including changes to the consumption tax, in or after autumn. "Drastic taxation reforms are necessary, so of course we have to discuss the issue," the prime minister said.
Many economists have pointed out that Japan cannot avoid implementing radical fiscal and taxation reforms, such as lowering the effective corporate tax rates to improve companies' international competitiveness and raising the consumption tax rate to secure budget resources for social welfare.
But raising the consumption tax rate is extremely difficult by its nature, because it directly affects people's daily life.
The Democratic Party of Japan increased its upper house seats with an election promise to keep the consumption tax rate at 5 percent, so debates on drastic taxation reforms will likely become complicated.
At a meeting of Group of Seven finance ministers and central bank governors in April, the member nations were urged to implement structural reforms to ensure their fiscal health. The government's stance will likely undergo strict questioning at the next G-7 meeting in October and other international meetings.
The election result also will affect Japan's active participation in the formation of the global free trade system and domestic efforts to restructure the agricultural system as the precondition for the former.
It is uncertain whether an agreement can be reached at the World Trade Organization's Doha Round multilateral trade negotiation by the end of this year, as member nations have not reached consensus over how far they can go to protect domestic farming industries.
The Abe Cabinet has adopted the slogan "aggressive agriculture." The government has tried to pave the way to opening up the market of agricultural products by fostering "forward-looking" farmers and strengthening international competitiveness of the nation's agricultural industries.
The government wants to compile a reform plan to realize integration of farmland to ensure more efficient use of that land, and allow companies to enter the agricultural business.
But the DPJ presented an election promise to compensate farmers if they lose out due to lower import tariffs along with the progress in free trade systems.
If such a measure preserves the inefficiency of domestic agriculture, the reform drive will go into reverse and underline the contradiction between the government's efforts for free trade systems and the reality in the nation.
At the end of September, the term of office of three top officials in government-affiliated financial institutions--National Life Finance Corporation Gov. Nobuaki Usui, Japan Bank for International Cooperation Gov. Kyosuke Shinozawa and Development Bank of Japan Gov. Takeshi Komura--will expire. All three were all formerly administrative vice finance ministers.
In March next year, Bank of Japan Gov. Toshihiko Fukui's term will expire.
The Abe Cabinet had picked talented individuals from the private sector for top positions in Japan Finance Corporation for Small and Medium Enterprises and other semipublic financial institutions, based on personal connections of Abe's aides. But economists predict the prime minister's influence will wane after the stinging election defeat.
They assumed it would be difficult for Abe and his aides to continue to hold the initiative in selecting top officials for the institutions, and it is possible appointments of such positions will not be influenced by the prime minister's policy line.
(Jul. 31, 2007)