Memo on the Consumption Tax

Nothing says Happy New Year like talk of a (consumption) tax hike. Noda got the DPJ to go along by pushing the initial raise to 8% back six months from the original proposal to April 2014, and what’s a few months this way or that, no? Ozawa’s Plan A must be to get acquitted in time to mount a challenge in the DPR leadership election next September against a weakened Noda. Must get busy now; in the meantime, the following is a memo that I wrote a little over a week ago around the issue. I hope that you find it relevant. Finally, I wish you all nothing but happiness and joy in the year to come and thereafter.

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1. A majority of the Japanese public believes that a consumption tax hike is inevitable. The 1988 introduction of the consumption tax was highly unpopular with the Japanese public.
2. Big business generally supports a consumption tax hike. There is no overt opposition from SMEs, who, like big business, a) do not like the government's idea of shifting the growing burden of the social safety net on the shoulders of businesses (pushing 20-30 hour workweek employees into the Kosei Nenkin hurts big and small business alike) and b) would like to see the corporate tax instead. The 1988 introduction of the consumption tax was fiercely opposed by SMEs and many other businesses
3. The MSM generally supports a consumption tax hike. The MSM was split in 1988.
4. The LDP has supported a consumption tax hike. The opposition parties were strongly opposed in 1988.
5. Public disgust over the Recruit scandal that contaminated virtually the entire LDP leadership likely had some effect on the1990 election results. Besides, the 1986 election results were exceptional, making the 1990 results look worse that it is in a historical context. The 3% to 5% hike did not keep Hashimoto and the LDP from winning in the 1996 election, already well into the post-bubble decade.

So what's the problem?
1. Public mistrust of the conventional political class. The lack of political leadership and policy consistency has sapped the credibility of both major parties in asking the public to pony up. (That is why the largely symbolic (in fiscal terms) value of a notional downsized Diet is taking on significance.) The DPJ has had a longer distance to fall, which they did because only a small fraction of the promised savings materialized in its first three years in power. (There were of course Hatoyama's Futenma debacle and incoherence and Kan's inability to articulate and execute. Noda has so far proved (sic) pedestrian, though his persistence should prove useful in getting a compromise on the consumption tax.)
2. Poor economy. The argument is that this is not the time to put the brakes on consumption. That's a reasonable argument, although a trigger for 2013, BTW the more likely arrangement, should take care of it. (Economists and analysts argue over the effect on consumption and savings. I'm not competent to go into that; suffice to say that opponents bring up this argument and many of them no doubt believe it.)
3. The battle for the periphery. The DPJ won the (upper house) 2007 and 2009 elections in part by capturing seats in the periphery, many in districts in traditional LDP strongholds--with low-income, elderly demographics, who will feel relatively more pain from the tax hike. (To be fair, the DPJ also win in the metropolitan districts.) The LDP wants those voters back in their fold, while DPJ parliamentarians with insecure seats (presumably skewed heavily toward Ozawa allies and dependents) will be tempted to vote for their constituents' purses.

2012 should be a good year for the economy, while economists largely agree that it will be less so in 2013. Arguably, it's now or never for the Noda administration. But it can't do anything about the mistrust. But neither can the LDP. Public perception that the LDP is opposing a tax hike--and that's only if they actually manage to cohere around a clear position in opposition--for purely tactical reasons will cause significant damage to the LDP as well. One possibility lies in ganging up on the smaller parties and place the bulk of the consequences of downsizing on the proportional seats, make a compromise on a trigger-equipped consumption tax bill, then let Diet members vote their conscience. There is a huge upside/downside risk here, though. The likelihood of lopsided results become much higher with a smaller proportional-seat cushion. And voting their conscience may only delay the onset of thoroughgoing realignment. Also militating against the compromise that I suggest would be the LDP-Komeito campaign alliance, which the LDP would be loath to give up.

Those are my thoughts as of now. I know there is no convincingly overriding scenario here; all I'm sure of is that the LDP can't let Noda have his consumption tax and declare victory, nor can Noda drop the consumption tax hike and go on as if the whole series of events had never happened.