The unpopular consumption tax hike will raise the tax from 5 percent to 10 percent by 2015. The country's severe debt situation required such action, even before the 2011 Tohoku earthquake necessitated an expensive recovery package. But Japan's debt is so large — and growing so quickly — that this is only the first of many steps required to rein in the country's finances. Unfortunately for the DPJ, the act of taking this first step is already wrecking the fragile political balance that allows the current Japanese government to hold on to power.
It is well known that Japan is experiencing chronic budgetary crises. The country has run massive deficits for the past two decades, the economy has become addicted to stimulus spending and Japan has the world's oldest and fastest-aging demographic, which has triggered a gradual shift in the balance between workers and pensioners. At nearly 225 percent of gross domestic product (GDP), Japan's debt is unprecedented for a country in peacetime.
Japan almost certainly cannot grow out of this crisis. Its budget deficits regularly exceed 10 percent of GDP even as its demographic decline generates rising outlays for pensions and health care along with falling revenues. The new tax aims to raise about 2.5 percent of GDP annually. Though it attempts to address the emerging gap between tax revenue and total spending, the tax does little to address the problem of rising state expenses, which is what most of the electorate finds to be the issue with the current system. Consequently, it will not be enough to solve Japan's fiscal problem, especially considering that estimates show that a further consumption tax increase to 15 percent will be required within five years.
In forcing the tax change through, Noda may have sealed the fate of his political career and of his government. The tax issue was passed in direct contradiction of the DPJ's campaign promises, fracturing Noda's political alliance. That alliance included Ichiro Ozawa, a longtime powerbroker who has now turned his robust political influence against Noda and his government. Former Prime Minister Yukio Hatoyama has turned against Noda as well. In fact, such dissension forced Noda to seek opposition support to get the bill passed, and now the opposition will be demanding something in return, which will likely include the government's dissolution. Considering that 50 to 55 DPJ lawmakers look set to split from Noda's party to form their own — and that 49 to 54 defections would cost the DPJ its parliamentary majority — there is probably little that Noda can do to save his government.
The form that the next government would take is still unclear. The Liberal Democratic Party has been the dominant party for the bulk of the post-World War II era, but of late its credibility has been severely damaged (which is why the DPJ is in power). Regionalists have been making gains in popularity for the better part of a year as Japan goes through one of its generational shifts between centralized and fractured political management. However, it is far from clear that the regionalists have reached the point where they can seize power from the established parties. The result is far more likely to be some sort of hung parliament, with a coalition of regionalists forming a sufficiently powerful third pole that cannot be avoided or ignored. Such a Diet would be cohabited by the old and the new, politically stalled at the first step on a path of difficult reforms — with no one willing to make the political sacrifices required to put Japan's finances into some sort of order.
