Markets: News  

Japan tax hike approved despite rebellion

ReutersJapan's Prime Minister Yoshihiko Noda bows deeply after the tax hike bill was passed during the lower house plenary session at the parliament in Tokyo June 26, 2012.

HONG KONG (MarketWatch) -- The lower house of Japan's parliament voted Tuesday in favor of a controversial bill to double the consumption-tax rate to 10% by 2015, likely setting in motion a chain of events that could split the ruling party and lead to early elections.

The legislation, sponsored by the ruling Democratic Party of Japan, comfortably secured the lower chamber's approval, with 363 votes in favor and 96 against, as members of two major opposition parties supported the bills.

But 57 lawmakers from the ruling party voted against the bill, according to reports citing the NHK national broadcaster. That raised the possibility that those DPJ members who rejected the legislation may now leave the party.

If 54 or more lawmakers from the DPJ leave after this vote, the party will lose its majority in the lower house, which might leave it vulnerable to a no-confidence motion. That could force it to dissolve the lower house of parliament and call for elections before the current five-year term ends in 2014.

The DPJ is also short of a majority in the upper house of the parliament, where the tax-hike bill has yet to be approved.

The lower house's approval for the legislation and the possibility that a faction of the DPJ would vote against the bill were both well anticipated.

Internal opposition

Japanese Prime Minister Yoshihiko Noda had said on multiple occasions that he was staking his political career on the tax increase. Noda is Japan's sixth prime minister in the past six years.

"We have always been delaying decisions. ... I want to create a political environment where we don't put off decisions. Approval at the lower house today is a big step forward in this direction," Noda said at a news conference Tuesday after the vote, according to a Reuters report.

Faced with stiff internal opposition to the tax hike, Noda had reached out to the opposition parties for support. But the opposition parties have demanded that the PM dissolve the lower house of the parliament and call fresh elections in return for their support of the bill, according to several recent media reports.

A large faction of the DPJ, led by long-time party heavyweight Ichiro Ozawa, has strongly opposed the legislation and had threatened to vote against it, contending that the bills run against the promises the DPJ made to voters in 2009 when the party came to power.

After the vote Tuesday, Ozawa said he intended to stay with the party for the time being, but didn't rule out the possibility of leaving the DPJ to drive the Noda government "into a corner," according to a Kyodo news report.

DPJ Secretary General Azuma Koshiishi, meanwhile, said that he and the premier will decide how to punish party lawmakers who voted against the tax bill.

A Kyodo news report earlier on Tuesday had said that PM Noda might touch on issues such as an "amicable dissolution" of the lower house, along with the opposition Liberal Democratic Party at the press conference.

"The biggest uncertainty is whether [the] Ozawa group submits a no-confidence motion before three parties pass the consumption-tax-hike bill in the upper house," Nomura analysts wrote in a report Tuesday, before the outcome of the parliamentary vote was known.

"If more than 50 lawmakers in the lower house leave DPJ and form a new party, they can submit the [no-confidence] motion to the Diet," the Nomura analysts wrote in the report.

Warning of rate rise

Analysts have said that while the consumption-tax increase may not by itself be enough to improve Japan's fiscal health, a delay in the move could lead to a downgrade of the nation's sovereign ratings. Macquarie has estimated that every percentage point increase in the tax would boost government tax revenue by ¥2.5 trillion ($31.6 billion).

After the lower house approved the tax increase, Tom Byrne, regional credit officer for Asia at credit-rating firm Moody's, said an increase in Japan's consumption would be credit positive for Japan.

Byrne said that while the impact of the tax on political stability was unclear, it was doubtful that any fallout from the passage of the tax would further hurt Japan's credit rating. Read full story on Byrne's comments.

Earlier on Tuesday, a senior Bank of Japan official said long-term interest rates in the country could rise if markets fear that progress on fiscal reform will stall. Read more on the unhappy history of Japan's consumption tax increases.

"At present, long-term rates are extremely low because market participants believe the large fiscal deficit won't be left unattended and that fiscal reform will be implemented," Kazuo Momma, an executive director at the Bank of Japan, told a parliamentary committee, according to Reuters.

The International Monetary Fund had recently suggested that Japan should increase the consumption tax rate to at least 15% as part of its fiscal consolidation efforts.

Japan is currently the most indebted developed nation as measured by national output, with public debt exceeding two years' gross domestic product. But long-term interest rates in the country are extremely low as local investors funnel their savings to buy Japanese government bonds. Bond yields on 10-year Japanese government bonds are currently around 0.83%.

In volatile trading, the Japanese yen dropped against the U.S. dollar and the euro immediately after the results became public, but gradually recovered those losses, and more, in late afternoon trading. The euro (EURJPY) was fetching ¥99.08 compared with around ¥99.50 immediately before the vote, while the dollar (USDJPY) was changing hands for ¥79.30 versus ¥79.59.

Japan's Nikkei Stock Average (100000018) ended 0.8% lower at 8,663.99, before the parliamentary vote results became public.