Japan PM Yoshihiko Noda Tax Hike Policy May Fail To Boost Japanese Economy

After years of policy paralysis in Japan, Prime Minister Yoshihiko Noda has pushed a much-needed but unpopular sales tax hike through the lower house of parliament, but the chances of further reform in the world's third-largest economy seem unlikely.

After years of policy paralysis in Japan, Prime Minister Yoshihiko Noda has pushed a much-needed but unpopular sales tax hike through the lower house of parliament, but the chances of further reform in the world's third-largest economy seem unlikely.

Noda, 55, is low key and likened himself to a "dojo" bottom-feeding fish when he took office in September last year. However, the sixth prime minister since 2006 is set to achieve a breakthrough that has eluded several of his predecessors.

The doubling of sales tax to 10 percent over three years, a first step towards curbing a public debt that is already twice national output and a record for an industrialised country, was passed by the lower house on Tuesday.

Noda, by convincing his rivals he was prepared to call a snap election even at the risk of defeat, forged a deal with the opposition that allowed the tax bill to pass through the chamber, ending months of deadlock.

"In the world of Japanese politics, this is a pretty major thing. Against a lot of odds, he has been able to engineer a compromise that is quite far-reaching," said Jesper Koll, head of equity research at JPMorgan in Japan. "This is a major step."

Approval of the sales tax move by the opposition-controlled upper house seems to be on the cards, analysts said, though the process could be bumpy. But it's not likely the quietly assertive Noda will be able to achieve much more reform.

A section of his Democratic Party of Japan (DPJ) may be preparing to quit in protest, and he may be pushed into an election earlier than the scheduled August 2013.

With Noda's public popularity low and that of the opposition Liberal Democrats not much higher, a weak government that will not be able to make much policy headway would be the most likely outcome.

"Is the efficiency of government overall going to increase?" asked Koll. "Is this the end of the hung parliament? No, it's not."


Since 2007, Japan has suffered a 'twisted parliament' in which the ruling camp controls the powerful lower house but the opposition has a majority in the upper chamber, which can block legislation.

Now Noda's determination to raise the tax threatens to split the often-fractious Democrats after 57 of its 289 lower house members voted against the bill. Another 15 abstained or did not show up.



So far, Noda's persistence has won few if any plaudits from voters, although a big majority are also displeased with ex-Democrat leader Ichiro Ozawa, who led the revolt.

Support for Noda's cabinet was stuck at 27 percent in an Asahi newspaper poll published on Thursday, while only 39 percent backed the sales tax rise and 52 percent who opposed it.

Some pundits say Noda can still bolster his standing with voters if he stands firm against party rebels, forcing them either to recant or leave the party.

That would be taking a page from former Prime Minister Junichiro Koizumi, who kicked out opponents of his postal reform plans from his Liberal Democratic Party (LDP) in 2005 and then led the party to a massive election victory.

To be sure, Noda's low-key, everyman style is a far cry from that of the media-savvy, eccentric Koizumi.

"The Noda strategy is to stick to his guns - but not in a way that looks like Koizumi," said Chuo University political science professor Steven Reed.

"He is ... being remarkably Japanese, never giving in but taking baby steps forward," Reed said. "I think it will work as long as he gets somewhere."

Whether Noda is prepared to oust the rebels, though, is far from clear. Losing 54 or more members would deprive the Democrats and a tiny coalition partner of their lower house majority. That would leave him vulnerable to a no-confidence vote at worst and at best make passing any other laws tough.

"If he were like Koizumi, he would have already kicked them out," JP Morgan's Koll said. "Koizumi was erratic and eccentric. Noda is pragmatic and persistent."

Chances that Ozawa and his backers would bolt were growing on Friday, after a meeting the day before with a senior DPJ executive failed to bridge the gap over the tax rise.

Chuo University's Reed said Noda's dedication to fiscal reform could end up helping the party gain more seats than its biggest rival, the LDP, if not an outright majority, in an election that must be held by August 2013 and could come sooner.

Opinion polls - often volatile - suggest the Democrats would lose a hefty number of seats if an election were held soon while the LDP might also fall short of a majority.

That could leave Japan's political landscape more fragmented than ever, either forcing the two biggest parties into an uneasy embrace or sparking competition between then to woo smaller parties.

"Whatever happens, the next election won't result in a party with a stable majority. There will be a very shaky coalition and the frequent turnover of prime ministers will continue for a while," said Gerry Curtis, a professor at Columbia University.

"It could lead to a major realignment (of political parties), but the least likely possibility is that it will lead to the emergence of a strong party with strong leadership."