Japan may finance its basic pension scheme through a rise in its consumption tax, a senior official from the ruling party said on Thursday.
"We are not going to resort to using the sales tax from the beginning, but in the end I think we will conclude that it's best to finance the pension scheme with the sales tax," said Sadakazu Tanigaki, the Liberal Democratic Party's policy chief.
Tanigaki has said in the past that Japan will need to raise its consumption tax from the current 5 percent to address the problem of its huge public debt.
Japan is an ageing society with an already congenitally weak domestic consumption situation. Raising consumer taxes has one very well known impact on demand (as in elementary economics well known): it reduces it. Japan needs to think very carefully indeed before going down this road. Claus wrote a good analysis of what the likely consequences would be of raising Germany's VAT consumption tax by three percentage points last January to pay for the health system. At the time such arguments were dismissed, but as we can now see, the chickens are coming home to roost. The German comparison is important since, due to rapid population ageing, the German economy is dependent on exports in just the same way the Japanese one is.