The LDP’s tax revolt

The upper house has begun debating the Aso government’s second stimulus package and its controversial proposal to distribute roughly two trillion yen to Japanese citizens, 12,000 yen (US$132) per person in the hope of restarting the Japanese economy.

At the same time, the LDP is in the midst what could be the climactic battle in a long civil war over whether to raise the consumption tax.

The two policies are linked, the product of a bargain between the government and the finance ministry whereby the finance ministry agreed to release the stimulus funds in exchange for a commitment from the government to raise the consumption tax at the earliest possible date. Accordingly, the battle raging around these policies involves the same protagonists: on one side, bureaucrat bashers Nakagawa Hidenao, Yamamoto Ichita, and other Koizumian reformists (with Watanabe Yoshimi now sniping from the sidelines), and on the other, Aso Taro, Nakagawa Shoichi, his finance minister, Yosano Kaoru, the economy minister and longtime advocate of consumption tax increase as indispensable for sound public finance, and the Japanese bureaucracy.

The debate is over whether the government should include a commitment to phase in a consumption tax increase from 5% to 10% starting 2011 in the government’s mid-term tax program. In making the case for the increase, it appears that Mr. Aso and his ministers will emphasize the importance of the tax for providing economic security for all citizens. Asked about the planned increase in Diet proceedings Monday, Mr. Aso stressed the importance of restoring the country’s finances for providing pensions, health care, and welfare for Japanese citizens and insisted that Japan must wait no longer than the time it takes for the economy to recover to set about fixing its fiscal situation. In a sop to the reformers, Mr. Aso has also promised that any tax increase will be accompanied by efforts to cut waste and reform the bureaucracy.

Mr. Aso will likely spell out his thinking on the consumption tax question in his policy speech, which will not be delivered before January 26. Yomiuri reports that his address will spell out his economic philosophy and emphasize the need to put social security on surer footing — and also suggests that Mr. Aso will join in the capitalism bashing, criticizing “market fundamentalism” and distancing the LDP ever further from Koizumi Junichiro’s structural reform agenda.

Despite indications to the contrary, the government does not appear to be backing down from its commitment to either half of the stimulus package/consumption tax increase program, despite opposition from within the party, opposition parties, business leaders, and an overwhelming majority of the public. If anything, the government is doubling down on its commitment, despite taking a beating in the court of public opinion — and the prime minister is convinced he will get his way. Asked Monday evening whether he expects rebellion within the party over the bill to revise the tax system for the 2009 fiscal year, which will contain the promised consumption tax increase, Mr. Aso dismissed the idea. His finance minister rejected an appeal from a ministry shingikai to withdraw the stimulus package with an outright “no.” Jun Okumura thinks there might be more to it, but it seems possible that the Aso government is so far gone down this path that to abandon this course of action could mean the end of the government, the final push that brings the government’s approval rating into the single digits and results in a vote of no confidence.

In any case, in Monday’s deliberations Mr. Aso reiterated his government’s decision to push forward with the stimulus package

Of course, pushing ahead with the scheme could mean the end of the government as well. While Mr. Aso dismissed the chances of a rebellion should the government need a supermajority to reapprove its bills in the Diet during the current session, the possibility is all too real. The Koizumians, having become the LDP’s anti-mainstream since Mr. Koizumi left office in 2006, may finally have been pushed too far. As the Tokyo Shimbun reminds us, it will take only sixteen rebels to defeat the bill should the lower house have to pass it again over upper house opposition. Will sixteen emerge? Even without considering the Koizumians, the Aso government could be in trouble. Even Tsushima Yuji, head of the LDP’s tax commission and head of the Tsushima faction, has voiced his opposition to explicitly setting a date for the introduction of a consumption tax increase. One does not need to be a Koizumian to wonder whether it is politically sensible to commit to a consumption tax increase when it appears that Japan still has not reached bottom in the current economic crisis.

But should Mr. Aso get his way in party deliberations and succeeds at introducing a consumption tax commitment into Diet deliberations, the LDP’s reformists may finally stand up and say no to the government after two years of being pushed to the side, with Nakagawa Hidenao and Yamamoto Ichita the two leading figures in the campaign against both sides of the government’s bargain with the finance ministry. Mr. Nakagawa’s fight is as much against the bureaucracy as it is with Mr. Aso. In this post at his blog, for example, Mr. Nakagawa argues that the bureaucrats are insensitive to the lives of the Japanese people, that their planning on the consumption tax question is based solely on economic statistics instead of on the reality of daily life. Mr. Yamamoto writes at greater length on the reasoning behind the opposition of the reformists. Mr. Yamamoto, like Mr. Nakagawa, claims to not be opposed to the consumption tax increase in principle but believes that other steps must be taken first before introducing the tax: steps to eliminate waste, cut the number of Diet members (an intriguing idea, seeing as how Japan has nearly two hundred more national legislators than the United States for a country with just over a third the population), and combat amakudari. He also rejects the arguments floated to defend the idea that a consumption tax increase is political suicide for the LDP — Mr. Yamamoto finds the notions that the public will praise Mr. Aso for tackling the consumption tax issue and for showing how the LDP will pay for its proposals (unlike the DPJ) laughable.

Messrs. Nakagawa and Yamamoto have now been joined by the maestro himself, Mr. Koizumi. The former prime minister met with Mr. Nakagawa and Takebe Tsutomu Monday evening and declared that the idea of setting a date for the introduction of a consumption tax increase is mistaken. Mr. Koizumi’s guidance might not influence the government, but it may steel the resolve of the LDP’s reformists. I wonder too whether Watanabe Yoshimi’s now constant presence on television will give courage to his former compatriots, providing a reminder that they have a place to go should they decide to rebel against the government. Mr. Watanabe’s decision to act as an advance guard may yet prove to be a wise decision.

In any case, as this debate unfolds it is worth noting that the tax debate captures everything that is wrong with the LDP today and illustrates why prime minister after prime minister has failed to govern.

The tax issue encompasses everything: Kasumigaseki-Nagatacho relations, the size and role of the state, the future of economic governance (neo-liberalism versus something else), control of the LDP and the government, and the LDP’s prospects beyond the 2009 general election. It shows that the LDP is several parties traveling under one label, several parties that increasingly see the political system in fundamentally irreconciliable ways. Mr. Aso and his predecessors have failed because the LDP is beyond the command of any one politician. Japan is ungovernable because the LDP is ungovernable, meaning that the loser in all of this is, of course, the Japanese people, who are no closer to having a government capable of fixing the government’s finances and providing the protection they desire.

Is such a government waiting in the wings? The DPJ has been sniping on the sidelines of the LDP debate, presenting an argument similar to the LDP’s reformists — the DPJ will oppose any bill stating a date for a consumption tax increase because efforts to reform the bureaucracy should precede any increase in the tax burden for the Japanese people. The DPJ, however, should tread carefully. It is easier to bash the bureaucracy than to offer a plan to fix the budget that does not include a consumption tax increase in some form. And if and when the DPJ forms a government, it will need that selfsame bureaucracy in order to govern.

Finally, as an aside, it is worth asking whether the current Diet, nearing the end of its term, should be allowed to vote on such weighty matters as whether to provide a stimulus package of dubious effectiveness or to commit to a consumption tax increase. While in a purely technical sense the current Diet is, of course, legitimate, it is in some sense a lame duck Diet, given the likelihood that the government will call an election as soon as it has the 2009 budget in hand. Why should a collection of parliamentarians, many of whom will no longer hold their seats at year’s end, be allowed to decide Japan’s fate at this critical turning point? It is clear why Mr. Watanabe wants an election to be held immediately.

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