Too Little, Too Late? Raising the Consumption Tax to Shore Up Japanese Finances

Abstract

:After a long struggle, a three-party alliance led by Prime Minister Noda Yoshihiko of the Democratic Part of Japan (DPJ) succeeding in passing legislation to double Japan’s consumption tax rate to 10 percent. Though Japan’s huge public debt continues to expand at an alarming pace and the new tax is still only half the level of most European countries, its passage does suggest that the Japanese political system has unexpected capacities to take necessary but unpopular decisions. However, the new legislation bypassed other fiscal reforms that would have angered older Japanese voters, and the tax increase alone will be insufficient to defray the spending pressures exerted by Japan’s aging society. Analysis of Japan’s partisan dynamics and comparisons with the experiences of Australia, the UK, and other OECD countries suggest why the tax hike became possible—and why a more fundamental solution may prove elusive absent the stimulus provided by a financial crisis