Japan’s Aso Agrees to Sales Tax Deal in Bid to Heal LDP Rift

Japan’s Aso Agrees to Sales Tax Deal in Bid to Heal LDP Rift

By Sachiko Sakamaki and Takashi Hirokawa

Jan. 22 (Bloomberg) -- Japan’s Prime Minister Taro Aso agreed to delay raising the country’s 5 percent sales tax unless the economy recovers, in an effort to heal a rift within the ruling party ahead of elections later this year.

The ruling Liberal Democratic Party said today it will submit a bill next year that aims to raise the consumption tax by 2011 without committing to that date. Aso maintains the measure is needed to balance the budget.

Lawmakers within the LDP have joined members of the Democratic Party of Japan in opposing Aso’s proposal, saying it would hurt consumption during a deepening recession. A former cabinet minister quit the ruling part last week and called for the resignation of Aso, whose approval ratings have tumbled since taking office in September.

“Our concerns have pretty much been wiped away,” Yasuhisa Shiozaki, a former Chief Cabinet Secretary who was critical of the plan, said after the LDP meeting today. “The original plan gave the impression the sales tax absolutely would be raised in fiscal 2011.”

Rising unemployment and falling wages have helped send Aso’s approval rating below 20 percent, threatening to end more than 50 years of almost unbroken LDP rule ahead of elections that must be called by September. Former Financial Services Minister Yoshimi Watanabe quit the party last week.

Falling Exports

A government report today showed exports fell by a record last month, signaling companies will need to fire more workers.

The world’s second-largest economy will shrink 1.8 percent in the year ending March 31 and 2 percent next year before recovering to expand 1.5 percent in the period through March 2011, according to Bank of Japan estimates.

Aso, who is scheduled to make a policy speech on Jan. 26, is struggling to get a stimulus package through parliament that includes making 2 trillion yen ($22.4 billion) in cash payments to households.

“Why are they wasting their time on these arcane political intricacies?” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. “What they really need to be doing is looking for measures to offset the damage from exports. They need to do something to boost domestic demand.”

To contact the reporter on this story: Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net; Sachiko Sakamaki in Tokyo at Ssakamaki1@bloomberg.net.

Last Updated: January 22, 2009 01:32 EST