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Tuesday, July 13, 2010
A setback for Mr. Kan
In Sunday's Upper House election — the first national poll that the ruling Democratic Party of Japan has contested under the leadership of Prime Minister Naoto Kan — voters demonstrated their lack of faith in the DPJ by taking away the ruling coalition's majority in the chamber of the Diet.
The divided Diet will make Japan's political situation more unstable. Every political party should set aside petty issues and instead place priority on finding solutions to the nation's serious economic, fiscal and social welfare problems.
Apparently buoyed by his Cabinet's high approval rating soon after its formation, Mr. Kan seemed to have believed that his party would do well in the election. But he stumbled seriously by failing to present voters with persuasive proposals.
The prime minister's main election theme was a call to raise the consumption tax. The Liberal Democratic Party, the top opposition party, also called for raising the tax. Both parties view a consumption tax hike as an effective means to reduce the government's massive deficit. Japan's outstanding government debts stand at ¥862 trillion or 180 percent of its gross national product — worse than Greece's corresponding figure of between 130 percent to 140 percent.
Mr. Kan made several tactical mistakes on the consumption tax issue. First, his sudden proposal took voters by surprise. His predecessor, Mr. Yukio Hatoyama, had said that he would not raise the tax during the Lower House members' current term. Second, Mr. Kan gave the impression that the consumption tax will be raised immediately.
Third, and most seriously, remarks made by Mr. Kan gave voters the impression that he had not thoroughly thought out his own proposal. The DPJ's election manifesto only called for supra-partisan consultations on the reform of taxes, including the consumption tax, but Mr. Kan started saying that he would use the LDP's proposal to raise the consumption tax rate from 5 percent to 10 percent as a "reference." This move by the prime minister gave voters the impression that he was merely borrowing ideas from the opposition instead of coming up with them on his own, and thus made him appear to be less reliable as a leader.
Once it became clear that his proposal for raising the consumption tax was unpopular, Mr. Kan started talking about various measures to lighten the consumption tax burden on low-income people, including refunding the increased tax portion to them in the form of rebates. But it was clear to voters that these measures had not been debated in detail in the DPJ, and thus Mr. Kan's credibility was further damaged.
At a news conference, Mr. Kan attributed his party's defeat to a lack of meticulous explanations on his part. But it is obvious that his overconfidence led him to act hubristically and he treated the consumption tax issue far too lightly. The election results will also strengthen the forces within the DPJ that oppose a consumption tax hike, making it more difficult for Mr. Kan to obtain a party consensus on the issue.
If the government wants to discuss raising the consumption tax, it should first make a serious effort to cut waste in the government's total budget, which tops ¥200 trillion. In discussing tax reform, the government needs to give consideration not only to the future level of the consumption tax but also to how to strengthen the income tax's function of redistributing income.
Both the DPJ and the LDP call for lowering the corporate tax, but there is no clear evidence that such a move will boost economic growth, employment and wages. If the consumption tax is increased, the additional funds should be used to improve social security measures, not to compensate for revenue lost as a result of cutting the corporate tax. The parties should also seriously consider the possibility that a consumption tax hike could stall the economic recovery.
For its part, the LDP should not interpret its strong electoral showing as an endorsement for its policies, as many voters were merely registering their displeasure with the DPJ. The LDP would do well to remember that its years of pork-barrel spending, especially in the form of massive public-works projects, caused Japan's current national debt nightmare.
Many floating voters who did not want to support either the DPJ or the LDP opted to vote for Your Party, whose platform calls for small government and a decrease in the size of the bureaucracy. The party increased its strength in the 242-seat Upper House from one seat to 11 seats and it now can play a pivotal role. The DPJ, the LDP and Your Party call for a reduction of Diet seats. Such a move, however, could lead to the suppression of minority opinions.
The problems of the economy, state finances and social welfare are intertwined with each other in a complex manner. All the political parties must leave behind partisan interests and concentrate on working out effective and coherent policy measures to solve these entangled problems.