- Posted July 6, 2012 by
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Japan and tax
The head of the International Monetary Fund said on Friday Japan's plan to raise its sales tax is appropriate and timely but more measures should be taken to fix its public finances.
IMF Managing Director Christine Lagarde, speaking at a news conference, also welcomed the European Central Bank's move to cut its deposit rate, calling it an important step to activate interbank markets.
The European Central Bank cut its main interest rate to a record low on Thursday to prop up a deteriorating euro zone economy and reduced its deposit rate, which acts as a floor for the money market, to zero from 0.25 percent.
Lagarde also said the yen was moderately overvalued. When asked about Japan's yen-selling intervention in case of rapid currency swings, she said it would be justifiable if Japan duly consulted with other countries.
Japan's government could run out of cash by October
Tokyo - Japan's government could run out of money by the end of October, halting all state spending including salaries, pensions and unemployment benefits, because of a standoff in parliament that has blocked a bill to finance the deficit.
The deficit financing bill, which would allow the government to sell bonds needed to fund almost half of the budget, has languished in parliament as the ruling Democratic Party tussles with opposition parties that can use their control of the upper house to reject legislation.
"Without this bill, the budget will collapse," Finance Minister Jun Azumi said on Friday, pleading for cooperation from the two largest opposition parties.
"It doesn't matter which party is in power. I really hope that we can get a multi-partisan agreement on the deficit bill."
If the bill is not passed, government spending would grind to a halt, the world's third-largest economy would be put in jeopardy and its standing among credit ratings agencies could suffer.
Japan is not the only developed nation that is staring at an imminent fiscal crisis. Greece's debt-strapped government could run out of money within weeks unless it secures a 31.8 billion euro tranche of bailout funds from the European Union.
The US economy is facing $4 trillion worth of expiring tax cuts and automatic government spending reductions at the end of the year, and a standoff in Congress makes the chance of a compromise over the so-called "fiscal cliff" look dim.
The impasse in Japan however comes just after Prime Minister Yoshihiko Noda won over the opposition to pass an increase in sales tax in the lower house of parliament. However, a section of his party quit over the vote, and is poised to form a new party.
Noda's Democrats still control a majority in the lower house of parliament, but are outnumbered by the opposition in the upper house. Many analysts say mid-term elections could be called.
"There's so much uncertainty over the political outlook that it's hard to say how big the risk is of the government running out of cash," said Naoki Iizuka, senior economist at Mizuho Securities in Tokyo.
"The key would be the timing of any snap election and who would be leading the Democratic Party at the time."
Opposition parties have threatened to delay Japan's deficit financing bill in the past but have eventually yielded and voted in favour. This time, however, the opposition may be more emboldened because of the row over the sales tax hike.
JAPAN'S FISCAL CLIFF
Japan's budget for the current fiscal year that started in April totals 90.3 trillion yen.
The deficit financing bill allows Japan to sell 38.3 trillion yen in government bonds to fund the budget. The remainder is funded by tax revenue, non-tax revenue and income from bonds earmarked for public works projects.
Government expenditure is forecast to reach 43.9 trillion yen by the end of September, Azumi said.
Assuming that the deficit financing bill does not pass, the government would have only 46.1 trillion yen on hand, Azumi said. This means the government is sure to run out of money by the end of October, he said.
The first in line to take a hit if Japan starts running out of money would be regional governments, which rely on tax grants from the national government for much of their spending.
The Finance Ministry could start cutting tax grants to local governments in September if there is no sign that the deficit financing bill will pass, Azumi said.
Japan already has the world's largest debt burden at nearly twice the size of its $5 trillion economy, and a breakdown in fiscal spending could increase skepticism that politicians are losing their grip on public finances.
The government would try to prioritize pension and unemployment payments, but once the money runs out, there is not much the government can do, finance ministry bureaucrats have said.
Prime Minister Noda could reach an agreement with opposition parties to provide some temporary funding. However, Noda does not have the right to override parliament on the voting of the deficit funding bill.
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