A political row over a temporary income tax cut emerged on Tuesday as a stumbling block to an economic package that Japan's coalition government is compiling to help people and firms cope with high energy and food prices.
The New Komeito party, the junior member of the ruling coalition, stepped up its call for a flat income tax cut that would benefit low income earners most, an idea that would be welcome among its own constituents but is not favoured by many in its partner the Liberal Democratic Party.
New Komeito policy chief Natsuo Yamaguchi said he told Economics Minister Kaoru Yosano the government needs to include a cut in income tax. "We will seek to reach an agreement on this with grave resolution," he told reporters. His comments came as speculation simmered that New Komeito, a partner of the LDP for nearly a decade, was growing increasingly worried about fighting an election under unpopular Prime Minister Yasuo Fukuda.
No poll for parliament's lower house need be held until September 2009, but New Komeito leader Akihiro Ota told Reuters last week that a snap election could come at any time from autumn onwards. "What is important is to get the support of the people and to do that we have to take policy steps," he said in an interview.
Ota told a news conference on Tuesday that steps are needed to support consumption as the economy appears to be in recession. The economy contracted in the three months to June and many economists suspect it is on the brink of a recession if not already in one.
LDP policy chief Kosuke Hori said on Monday it was hard to include tax cuts in the package, which he said could be worth 2-3 trillion yen ($18-27 billion). That is relatively small compared to Japan's annual budget of 83 trillion yen. Government officials have been at pains to say the package is intended to provide relief to households and companies struggling with steep costs, and not a repeat of the massive public spending projects Japan resorted to in the 1990s in an mostly ineffectual attempt to pump-prime the economy.
Ministers do not want to issue extra government bonds to fund the package, given that Japan is already saddled with huge public debt amounting to 1-times GDP. Asked if issuance of debt-financing bonds would be needed to finance it, Finance Minister Bunmei Ibuki said: "The prime minister has said he wants to avoid such issuance, so it is a cabinet minister's job to seek that."
While additional government debt could push down Japanese government bond prices, analysts say an extra 1 to 2 trillion yen would not have a big impact on the market. Ibuki told a news conference the debate on how to fund the package would include the possibility of compiling an extra budget, although the prime minister had not asked him to do so.
The chance of an extra budget is in focus because it could be funded by reallocating existing spending or tapping into reserves rather than issuing debt, depending on its size. Yosano reiterated that he wanted to avoid more bond issuance but added: "It will depend on whether we have steps that need to be implemented even if that will entail borrowing." Some ruling party officials have suggested the government could use reserves held in special accounts - so-called "hidden treasure" - to fund the package so as to avoid issuing new debt-covering bonds.
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