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Viewing cable 06TOKYO1567, CONSENSUS EMERGING TO RAISE CONSUMPTION TAX TO 10

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Reference ID Created Released Classification Origin
06TOKYO1567 2006-03-24 08:34 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Tokyo
VZCZCXRO0522
RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #1567/01 0830834
ZNR UUUUU ZZH
R 240834Z MAR 06
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 0129
INFO RUEHBJ/AMEMBASSY BEIJING 1313
RUEHFR/AMEMBASSY PARIS 4881
RUEHUL/AMEMBASSY SEOUL 7501
RUEHFK/AMCONSUL FUKUOKA 5305
RUEHNAG/AMCONSUL NAGOYA 5317
RUEHNH/AMCONSUL NAHA 7938
RUEHOK/AMCONSUL OSAKA KOBE 8454
RUEHKSO/AMCONSUL SAPPORO 6488
RUEATRS/TREASURY DEPT WASHDC
RUCPDOC/USDOC WASHDC
UNCLAS SECTION 01 OF 02 TOKYO 001567 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PLS PASS USTR FOR CUTLER, BEEMAN 
TREASURY FOR IA/SOBEL, LOEVINGER, DOHNER, GREWE 
USDOC FOR ITA/OFFICE OF JAPAN 
PARIS FOR USOECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN JA
SUBJECT: CONSENSUS EMERGING TO RAISE CONSUMPTION TAX TO 10 
PERCENT, SAYS LDP'S YANAGISAWA 
 
 
SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY 
 
1. (SBU) Summary:  A domestic business sector consensus is 
emerging in favor of raising Japan's consumption tax from 5 
to 10 percent, and the Japanese people are ready to accept 
it, according to LDP Tax Policy Committee Chairman 
Yanagisawa.  A Cabinet decision to increase the rate is 
expected in June, although it will not specify the timing or 
amount of a future increase.  The actual increase is likely 
to be phased in between 2009 and 2015, Yanagisawa told 
Embassy EMIN. Yanagisawa did not discuss the potential 
adverse impact on private demand of a consumption tax 
increase.  End Summary. 
 
2. (SBU) A business sector consensus is emerging in favor of 
raising Japan's consumption tax to 10 percent from the 
current 5 percent rate, LDP Tax Policy Committee Chairman 
Hakuo Yanagisawa told Embassy EMIN on March 16.  During a 
meeting with Yanagisawa the previous day, representatives of 
the Japan Business Federation (Nippon Keidanren) had 
advocated increasing the consumption tax at the earliest 
possible time, citing the fact that Japan's 5 percent 
consumption tax rate is "extremely low" compared with other 
OECD countries.  Yanagisawa reported hearing similar views 
from local business circles.  Half jokingly he remarked that 
the only ones who do not share this view are Japanese 
housewives, who are sensitive to even a one-point increase 
and would not be won over easily.  Nevertheless, he asserted, 
the Japanese people are prepared for an increase to 10 
percent.  The only issues to be settled are whether the 
increase would take place all at once or in stages and 
whether there would be any exemptions such as food. 
Yanagisawa said he would favor no exemptions unless the tax 
is set above 10 percent. 
 
3. (SBU) On the timing of a consumption tax increase, 
Yanagisawa said that some increase in 2009 was inevitable, as 
the revision of Japan's Pension Act scheduled for that year 
would increase the share of basic pensions paid from tax to 
half from the current one-third.  A one-percentage-point 
increase in the consumption tax rate would be sufficient to 
cover this additional expenditure, he noted.  Yanagisawa's 
preference, however, would be to defer any further increase 
until 2015, the year Economic and Fiscal Policy Minister 
Yosano is targeting to achieve a primary surplus of 10 
trillion yen, about 2 percent of GDP.  (Comment: A one-time 
increase in the consumption tax from 5 or 6 percent to 10 
percent would likely have a contractionary macroeconomic 
impact on 2-3 percent of GDP.  End Comment.)  Yanagisawa 
cited 2011 as another possible target, since Yosano is aiming 
to eliminate the GOJ primary deficit by then, but Yanagisawa 
said he opposes making staged increases in both 2011 and 2015. 
 
4. (SBU) Yanagisawa said he expects a Cabinet decision on a 
road map for the consumption tax increase in June, but the 
road map would be silent on the timing of specific measures 
in order to allow future decisions based on economic 
circumstances at the time. 
 
5. (SBU) Yanagisawa added that the GOJ has not yet agreed on 
the baseline for annual revenue to use in its fiscal 
projections.  LDP Policy Council Chairman Hidenao Nakagawa 
and MIC Minister Takenaka favor a rising baseline that 
reflects Japan's improved economic outlook, while Yosano and 
Finance Minister Tanigaki prefer a flat revenue baseline. 
 
6. (SBU) Comment:  As chair of the LDP Tax Policy Committee, 
Yanagisawa faces competing pressures to address Japan's 
fiscal challenges while trying to minimize the difficult 
fiscal choices that Prime Minister Koizumi's (presumably LDP) 
successor will inherit.  Koizumi's promise not to raise 
consumption taxes during his term, while politically 
expedient, also reflected the memory of Japan's disastrous 
1997 consumption tax hike that, together with the Asian 
financial crisis and a domestic banking crisis, helped choke 
off a nascent recovery.  Notwithstanding business sector 
 
TOKYO 00001567  002 OF 002 
 
 
support for raising the consumption tax as soon as possible, 
the timetable Yanagisawa described seems calculated to put 
off any increase as long as possible.  The adoption of a 
"road map" in June would give Koizumi's successor some 
breathing room on the consumption tax issue, but the next 
prime minister will still face politically difficult 
decisions, as significant spending cuts would be required to 
achieve a primary balance by 2011 and a 2% of GDP surplus by 
2015 without a major increase in revenue. End comment. 
SCHIEFFER