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No. 19 — May 12, 2000

Feature Article

A LOOK AT JAPAN'S CONSUMPTION TAX

Hiroyuki Takahashi

Summary

Every three years, Japan's Tax Commission — an advisory council of about 30 appointed by the prime minister, which includes academics, industry leaders, accountants, tax experts, governors and mayors — issues a comprehensive paper on the state of the nation's tax system. The commission's next report, due out in July, is expected to provide a road map for much-needed tax reforms.

The commission has been studying Japan's budget crisis, a problem greatly aggravated by revenue losses caused by recent tax-relief measures — mainly decreases in individual and corporate income tax rates — and by large increases in the government's deficit spending. It also has been examining new tax issues that have been created by the county's aging population's and low birth rate and by changes to the Japanese economy caused by globalization and emerging information technologies.

According to insiders, the report's authors will conclude that tax increases are necessary and will suggest that the national consumption tax is the best candidate for a tax hike. The commission, however, also needs to discuss whether the consumption tax revenue should be targeted for social welfare spending. The commission's position is sure to be politically charged. Reportedly, for this reason, the publication — originally scheduled for release in April — has been delayed.

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Weekly Review

JAPANESE ECONOMIC INDICATORS POINT UPWARD, MORE OR LESS
--- by Douglas Ostrom

Will consumers loosen their purse strings when their incomes are flat or falling? Will businesses resume spending on plant and equipment even though they are judged to have too much physical capacity already? The fate of the Japanese economy over the next few months appears to hang on these questions. While a number of short-term indicators are looking up, sustained growth depends on individuals and companies behaving in ways that seem somewhat illogical at first glance. Not surprisingly, nearly all analysts have couched even moderately upbeat economic forecasts in qualified terms.

 

FIRST POSTWAR FAILURE OF NONLIFE INSURER RAISES WARNING FLAG
--- by Jon Choy

After several years of hard work and many trillions of yen, Japanese financial industry policymakers and executives appear to be well on the way to resolving the nonperforming-loan crisis that threatened the nation's banks and banking system. Just as the aftershocks of that debacle were waning, however, observers began to warn of similar problems in Japan's insurance industry. Regulators in the Ministry of Finance and the Financial Supervisory Agency started prodding insurers to address their own weak balance sheets in order to avoid the fate of banks that had not attacked their bad-loan problems aggressively enough.

 

CLINTON-MORI MEETING FEATURES CEREMONY RATHER THAN SUBSTANCE
--- by Barbara Wanner

Wrapping up a whirlwind nine-day tour of the Group of Seven industrial nations plus Russia, Prime Minister Yoshiro Mori met with President Clinton May 5 at the White House. Their visit of a little more than an hour was long on formality and short on content despite pressing bilateral trade and security-related issues. Nevertheless, Japanese officials seemed satisfied with the meeting. They pointed out that the purpose of the prime minister's hastily arranged diplomatic mission was to enable Mr. Mori — catapulted to the premiership April 5 to succeed Keizo Obuchi, who had been felled by a stroke three days earlier (see JEI Report No. 15B, April 14, 2000) — to become personally acquainted with his counterparts and, in so doing, lay the groundwork for a productive 2000 G-8 summit, which Japan will host July 21 to July 23 on Okinawa.

 

NOTES

Telecommunications And Deregulation - Tokyo has said on any number of occasions that it hopes negotiations intended to break the impasse over the contents of the final report on regulatory reform under the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy will not overshadow the July 21-23 summit of the leaders of the Group of Seven industrial nations plus Russia. However, the government has set itself up for just such an outcome. Trade officials have informed the Clinton administration that Japan will not be in a position to conduct high-level talks on the major source of the deadlock — the fees that Nippon Telegraph and Telephone Corp.'s two regional operating units charge other common carriers to use their networks — until after elections for the Diet's lower house take place. Those polls likely will be held June 25. That informal scheduling gives Washington and Tokyo less than four weeks to achieve the settlement that has eluded them for the last six months.

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