Friday, January 18, 2008

Five Bills Face March 31 Deadline in Twisted Diet; BOJ Governorship Also on the Line

I looked into this to satisfy my own curiosity, but I thought that people who cannot read Japanese but are into the facts might be interested. I’d be happy to do a more detailed analysis, but hey, there’s only so much I can do without getting paid.

There will be five bills on the table that face deadlines. By the end of March, the main battlefront will be the gasoline taxes. The fight over the replacement for BOJ Governor should also be over by then. Let’s look at them one-by-one. Bill to:

1. Amend Income Tax Act and Others: The extension of national special tax measures is the main purpose of this amendment. The “temporary” supercharge on the volatile oil tax, set to expire at the end (March 31) of the fiscal year is the main event in this Diet session. The local road tax, collected as a national tax and distributed to local governments, also expires as of March 31. These two taxes, collected at the point of purchase on gasoline sales, comprise what I have been calling the gasoline tax. In the future, I will refer to them in the plural, as “gasoline taxes”, so as not to confuse them with the singular volatile oil tax.

2. Amend Local Tax Act and Others: Similar to 1, for prefectural and municipal taxes. The “temporary” surcharge on the automobile acquisition tax, collected and used by prefectural governments and also distributed to municipalities, expires as of March 31. The “temporary” surcharge on the automobile weight tax, collected as a national tax and also distributed to municipalities, expires as of April 30.

3. Amend Customs Tariff Act and others: Here, the key is the Temporary Customs Tariff Measures Act, under which the government reduces rates on much of its imports. The temporary reduction on beef expires as of March 31.

4. Adopt Special Measures Act on the Issuance of Public Bonds: Each year, the Diet passes a law to authorize the government to issue a set amount of so-called akaji kokusai, or national bonds to cover the national budget deficit*.

5. Extend Extraordinary Measures Act on Financing Funds for the Improvement of Fisheries Processing Industry Facilities: It authorizes government-backed, long-term, low-interest financing for… the improvement of fisheries processing industry facilities, what else. It expires as of March 31.

Let’s deal with the easy ones first. No.5 looks like a gimmie. Nobody wants to annoy the fishing lobby, though they could wait a few weeks for a Lower House override if it comes to that. No. 3 is an even easier call, since nobody wants to piss off, in no particular order: all consumers, all developing countries, the United States, and Australia, the world’s largest kangaroo meat exporter, to name just a few.

No.4 will pass eventually; the opposition cannot deny the short-term reality that without the authorization, the government will grind to a stop at some point during the fiscal year. The opposition will look highly irresponsible if it lets the bill linger in the Upper House into the new fiscal year before the Lower House passes it with the override, likely at some point in April. The DPJ is apparently willing to give a pass to a bill that will be submitted as part of the FY2007 supplementary budget package** to authorize local governments to issue deficit bonds to cover FY 2008 revenue shortfalls, and I see the same thing happening with regard to the FY 2008 national deficit bonds. Along the way, the opposition will surely criticize the ruling coalition for, say, “the long years of fiscal mismanagement that created this mess”. I think that this particular debate will be more like a wash, since the ruling coalition can also score some points by demanding that the DPJ account for the multitrillion coverage for its public pension funding, subsidize-the-microfarmers and childcare subsidies and other proposals.

So it boils down to Nos. 1 and 2. They are a package, but it is the gasoline taxes that really matter. I expect the Fukuda Cabinet to submit a bill that is allows for a possible hiatus between April 1 and the eventual enactment of the bill in the case of the gasoline taxes, since, unlike tax benefits, they cannot be made retroactive***. If they don’t, it probably means that they are daring the DPJ to play a game of Chicken. A relatively short delay in the tax benefits will not have a serious effect on the macro-economy, since the tax benefits mostly cover capital expenditures that can be delayed. A promise at some point from the ruling coalition that it would exercise the override (and thus make the measures retroactive) should erase any concerns in the market. But the gasoline taxes revenue during the gap will be lost forever. Somewhat less important, the two technical adjustments as the tax rates go down and back up again will cause confusing at the points of sale. All this assumes that the ruling coalition will exercise the override. That, I think, is the most likely outcome, given the balance of interests that both sides must consider. However, both sides will also be driven by public opinion and media coverage, so a compromise is possible. What I don’t think is possible: a snap election before the session is up; or total ruling coalition/opposition capitulation on the gasoline taxes.

Addition: The gasoline taxes in No.1 are taxed to the producer/wholesaler at the point of sale to the retailer, not at the pump as I had erroneously assumed. Thus, the “technical” adjustments will be far smaller than I had anticipated. However, difficult pricing decisions remain at the retail level and should cause confusion at the pump, where drivers will expect instant gratification while the lower tax rates must work (or not) their way into the retail price over several weeks. The light oil transaction tax, the local (prefectural) tax that is the diesel engine equivalent of the volatile oil tax (this is an important item that I'd originally missed; I have to see the eventual bill to produce definitive lists of the included items), is taxed to the retailer (non-gasoline, non-light oil hydrocarbon fuel used in internal combustion engines is taxed to the producer/wholesaler; kerosene is specifically mentioned, but alcohol fuel should be covered here), so the time lag between tax incidence and the final sale will be much shorter. This means that a temporary adjustment is much easier for trucks and buses than for passenger automobiles. Also, expect a drop in auto sales in the coming months in anticipation of a tax reduction after March 31 and a corresponding jump after that as auto buyers rush to take advantage of what I believe will be a temporary situation. (December 19)

Something else is set to expire as of March 19. Toshihiko Fukui’s term as the Governor of the Bank of Japan is coming to an end, and he has only a marginally better chance to be reappointed than President Bush has to be elected to a third term. In the past, Toshirō Mutō, currently Deputy Governor and former MOF Vice-Minister, would be a shoo-in, but the DPJ is strongly opposed to his appointment. It requires the consent of both Houses, and there are no provisions for an override. The Cabinet could reappoint him to the BOJ Board of Directors any way - his term is up as well, but it can do that without the Diet’s consent - and name him acting Governor, but it probably wouldn’t be the same. At a minimum, it will send a negative signal about Japanese governance when the global financial market may still be in the throes of the subprime-driven crisis. With the uncertainties in the Middle East, the inhospitable climate between the US and Russia, the US Presidential election, and the potential for acts of global terrorism, a BOJ leadership that lacks firm political backing is an unpleasant plan B. Both sides will be looking at public opinion polls and media coverage for guidance here as well, as they grope towards a compromise whose outlines nobody can ascertain as of now.

* Funding for roads, dams, development loans, etc. are covered by “national construction bonds”. These expenditures do not go into the budget deficit in the first instant because they create assets. I assume that depreciating assets must be amortized, but I have to check it.

** Every fiscal year, the Cabinet submits one supplementary budget (sometimes two) budgets to take care of unforeseen matters such as additional expenditures to cover earthquake damages and additional deficit bonds to cover increased tax revenue shortfalls, as well as additional expenditures and tax relief to goose the economy.

*** Actually, I think it would be unconstitutional.

Off topic: The media says that Masataka Kitagawa, the highly-influential former Governor of Mie Prefecture and reportedly first choice of the DPJ to challenge Shintarō Ishihara in the 2007 Tokyo gubernatorial, is getting together with businessmen, academics and other local political leaders to start a new policy study group. Could this movement be the catalyst for a true makeover of Japanese politics? If so, then it’s something that many people including me have been hoping for since the 90s, when many of the best and brightest of the establishment elite with political ambitions began to put national politics on hold and go into local politics. I’ll see if there’s more to post after they make the official announcement tomorrow, on Saturday.


Martin J Frid said...

Thanks for the update, that is very interesting.

The gasoline tax issue in particular could become a big debate in the weeks ahead. Since Fukuda wants Japan to lead the world in the environmental field, he is gambling hard to keep that tax, without explaining its links to Japan's severe oil dependency, and the link to peak oil (and oil at 90-100$/barrel).

Jun Okumura said...


Explaining it that way would call into question the entire energy-related tax regime, something that no major political figure, incuding Mr. Fukuda, is willing to do. It would also give the lie the "temporary" nature of the surcharge.

Incidentally, in my post, I've added some details (in italics) that I'd overlooked yesterday.