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Prime Minster Naoto Kan is seeking multi-party talks on tax and social security reforms as a top priority, as a rapidly ageing population weighs heavily on the pension system and threatens to drive Japan deeper into debt.
Japan's public debt is already nearly 200 percent of GDP, the highest among advanced countries, while its 5% sales tax is among the lowest in major economies, making a sales tax rise a viable step to fund soaring welfare costs.
Below are proposals by the ruling Democratic Party of Japan (DPJ) and main opposition parties on the sales tax and social security reforms. No policy platform talks about outright cuts in benefits.
DEMOCRATIC PARTY OF JAPAN
The DPJ in recent campaign manifestos has proposed a unified pension system to replace the existing scheme, which consists of separate components for the self-employed, company employees and civil servants.
The new system would be composed of a sales tax-funded portion that pays up to 70,000 yen ($850) a month to all eligible recipients, and another portion that pays out pensions according to each individual's paid-in premiums.
The payout from the first portion would be reduced for people whose income from the second portion exceeds a certain level.
A sales tax-based pension system enables the social security burden to be widely spread among different age groups, but naturally drives up tax rates.
The DPJ badly lost an upper house election last year after Kan floated a possible doubling of the 5% sales tax. It has recently made no mention of the scale or timing of any future sales tax hike.
But the Japan Association of Corporate Executives, a business lobby calling for a sales tax-based pension scheme similar to the DPJ's proposal, has called for the tax to be raised to 17% by 2017 — a 10% tax for the pension plan, 5% for local governments and 2% for the central government.
Economics Minister Kaoru Yosano, once a harsh critic of the DPJ's economic policy when he was with rival parties, said this month that a shift to a sales tax-based system could take decades to complete and further strain public finances, clouding the outlook of the reform debate.
Kan plans to have his ministers compile a comprehensive strategy to reform Japan's tax and social security systems by June, and aims to involve opposition parties in the process.
Speaking to the opening session of parliament on Monday, Kan warned that he would have to ask the public to "bear the burden" of growing social security costs. In the run-up to a lower house election in 2009, his predecessor, Yukio Hatoyama, repeatedly promised not to raise the sales tax for four years.
LIBERAL DEMOCRATIC PARTY
The LDP, the largest opposition party, has proposed modifying the pension system to make it more inclusive and transparent, rather than make fundamental changes.
The LDP has tentatively called for doubling the sales tax to support the pension system, child-rearing and care for the sick, elderly and handicapped. A rise of 1 percentage point in sales tax roughly translates into 2.5 trln yen in revenues.
The party, critical of what it calls the DPJ's populist steps such as subsidies for families with children, is reluctant to answer Kan's call for cross-party debate on tax and pension reforms.
"It is like throwing around money and asking others for help when the bill comes," said Sadakazu Tanigaki, head of the LDP.
NEW KOMEITO
Like the LDP, the New Komeito Party believes the basic structure of the pension system should be maintained. It sees little chance of the DPJ-proposed pension scheme being implemented because of hefty tax revenues needed to support the plan and the long transitional period required.
The party says social security and tax reforms must be addressed but has proposed no numerical target for sales tax hikes.
SUNRISE PARTY
Co-founded by Economics Minister Yosano, the small opposition party proposes extending the social security net to part-time workers and imposing compulsory collection of pension premiums from those who can afford to share the burden but do not.
The party's platform for the upper house election last year, when Yosano was still the party's co-president, called for raising the sales tax to 8% from the year starting April 2012 and lifting it to 12-15% after the economy recovers.
