TT-664 -- Ozawa and Consumption Tax Consequences, ebiz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, June 3, 2012, Issue No. 664


- What's New -- Ozawa and Consumption Tax Consequences
- News -- Labor disputes at record high
- Upcoming Events
- Corrections/Feedback
- Travel Destinations Picks -- Chiba and Miyazaki
- News Credits

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As much as we don't like DPJ politician Ichiro Ozawa and
his money-tainted politics, we have to agree with him on
one thing, that raising the consumption tax in Japan could
be harmful. Ozawa's public position is that consumption
tax is a regressive tax on the poor and that the government
has not done enough to root out wastage in the
bureaucracies and should focus on that first. He has a
point. While the traditional argument is that consumption
tax is fairer because it requires everyone in the country
to pay, not just salary earners, this argument is usually
presented in countries where there is a high level of
underground trading.

But Japan is both a highly compliant country in regards to
tax payment, AND, it has a lot of poor people who will be
affected by the increase. Indeed, as of 2007, it had the
4th highest level of poverty amongst OECD countries and
there were at least 10m households below the poverty line
(JPY2m annual income). Shockingly, that accounts for 15% of
Japan's kids. No wonder, then, that there has been some
talk of not charging consumption tax on some foodstuffs and
other essentials. You can review the child poverty issue at:

But actually, the reason we think consumption tax will be
harmful to Japan is not because it will hurt the poor. Poor
people have been getting the rough end of the stick for
a long time. Rather, the problem is that a sudden influx of
fresh cash will let the government engage in another 10+
years of profligacy, encouraging them to put off hard
decisions that they should be making now.

A possible raise in consumption tax has been the "ace up
the sleeve" for successive Japanese governments for a while
now, who look at the 22% rate in the UK and realize that
once you get the population used to the idea, admittedly
after a rough start-up period, then they accept it and
you're done with worrying about whether sufficient
companies are earning profits and people are employed --
so as to cover tax requirements. We're willing to bet that
the prospect of a flood of extra cash is the main reason
why that the DPJ brought out a raft of vote-winning
policies -- such as handing out cash to families with kids,
and now a proposed minimum JPY70,000 pension. Both of these
moves are admirable from a social safety net point of view,
but who's going to pay for them?

[Continued below...]

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[...Article continues]

Yes, a good question... Right now, to fund a budget of
JPY90.33trn, the country expects income taxes to provide
about JPY36.92trn, while bonds, asset sales, and other
creative fund raising will take care of the rest. In fact,
this is the third year in a row where fund-raising through
government bonds has exceeded tax income -- obviously an
unsustainable situation. Unfortunately, the annual deficit
is going to get worse. Not counting the proposed guaranteed
pension, the aging population is ratcheting up social
security costs by an additional JPY1trn a year.

Therefore, it is no wonder that increasing the consumption
tax is such an attractive option. Taking the tax rate to
10% will bring in an additional JPY12.5trn annually to
government coffers, while if it went to 20%, then the
amount would be about JPY37.5trn. Look forward 35 or so
years into the future, when there will be 20% less people,
and the income and expenditure numbers could conceivably
balance. Therefore, our take is that once the government
locks in a 10% rate, something they are trying to do by
October 2015 (8% by April 2014), then it won't be long
before 15% or even 20% will be considered viable as well.
Indeed, even Noda in a recent Keiyo University address said
that this might happen, although the government has since
pulled back from that position.

So, back to the profligacy argument. Ozawa is right that
there are so many areas that the government could be
tightening up on its spending, before focusing on more
taxes. Just take a look at the ongoing public works, the
overkill in new regulations such as barring the sales of
OTC drugs online, and worst of all, the thousands of
semi-governmental organizations sucking at governmental
income. These organizations are typically set up to
"support" various industries (with licence fees,
registrations, certifications, etc.) but in reality exist
to provide Old Boys with jobs and high salaries.

A good example recently in the news is the Japan Atomic
Power Company (JAPC). This is an organization that was set
up with government cash to build two nuclear reactors some
decades ago. This last fiscal year it was still levying its
power utilities customers 75% of its 2010 charges, thanks
to a fixed pricing system, even though it is only supplying
4.6% of the power it was in FY2010. Meanwhile, the
utilities are deep in the red and struggling with the costs
of importing massive amounts of oil and LNG to fuel their
generators. JAPC has nicely positioned itself in the supply
chain for power with TEPCO, and due to the fact it staffs
itself from the utilities (TEPCO's president Tsunehisa
Katsumata will join the board after resigning from TEPCO to
take responsibility for the Fukushima disaster), it clearly
has the power to set its own pricing and policy agenda.
This kind of arrangement is really quite disgusting, and it
really makes you wonder where and when the government will
ever get the gumption to tackle such subtle corruption.

OK, so we concede that the DPJ did try for a while to
eliminate some of these special interest bloodsucking
organizations, but it has made very little headway
recently. Not unreasonably, they have been distracted by
the earthquake and now by divisive politics. A recent poll
by by Kyodo News found that 72% of voters feel the same
way -- that the government has not done enough to eliminate
waste, and should focus on that before raising the
consumption tax. Ozawa is a wily old fox and is tapping
into a deep well of public resentment over the issue.

If there is no consumption tax increase, then we believe
the government will hit the wall within 3-4 years in terms
of being able to borrow on the local markets, and will have
to turn overseas for cash, at much higher interest rates.
There is a very good study from the Chicago University
website ( that posits the limit of government
domestic borrowing will be when it uses up the net total of
the nation's household financial assets, which are expected
to decline to about JPY1,340trn in 2016. This will be the
year at which Government debt will be a larger number.

One wonders why Ozawa is being so obstinate on fighting an
increase in the consumption tax. Is it because he fears
that the DPJ will be kicked out of office by a public that
rejects the increase? We don't think so, since polls done
on a regular basis indicate that 48%-58% (depending on the
poll) of voters already agree that an increase in
consumption tax is inevitable. Or is it simply that he is
playing a game of political chicken, and is trying to
divide the party so that Noda gets kicked out and he can
step back in? Probably.

But if he does hold back the consumption tax decision,
although he wouldn't know it, he will probably be doing the
nation a huge favor, by precipitating national change. We
say this because whomever wins the next election will
within their term be forced to resolve the fiscal imbalance
in one way or another. The Chicago University paper
speculates that the IMF may have to be called in to
supervise a massive cut in spending and significant
increases in taxes, forcing Japan's political system to do
what it has been unwilling to do so far.

And maybe that's what is going to be required: a massive
financial shock and some good old fashioned "gaiatsu"
(foreign pressure).

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+++ NEWS

- Labor disputes at record high
- Olympus settles with Woodford in law suit
- Maverick Nomura shareholder suggests squat toilets
- L'Oreal to increase manufacturing in Japan
- Online games companies see stock plunge

=> Labor disputes at record high

The Labor Ministry says that employment disputes between
employees and employers rose 3.8% in FY2011, to hit 256,000
cases. About 20% of the cases revolved around claims of
unfair dismissals, while 15% involved workplace
harassment. The other two most common disputes were over
worsening working conditions and early retirement
programs. ***Ed: It's clear from the numbers that small-to-
medium sized firms are still under a lot of financial
pressure and are still downsizing.** (Source: TT
commentary, Jun 2, 2012)

=> Olympus settles with Woodford in law suit

Olympus has apparently settled on a number in its
negotiations with former CEO Michael Woodford, after
Woodford's pursuit of an unfair dismissal claim. Although
the terms are supposed to be kept confidential, Bloomberg
ran a story which speculated that Woodford was
seeking $60m, representing 10 years in lost income.
***Ed: Interesting how, given that the venue for the law suit
was a London court, Olympus caved in so quickly to
Woodford's demands. They certainly don't need more time
under the media spotlight as they struggle to survive the
scandal.** (Source: TT commentary from,
May 29, 2012)

=> Maverick Nomura shareholder suggests squat toilets

In keeping with the Japanese commercial code, which allows
Nomura shareholders with at least 30,000 shares and who
have held them for longer than 6 months, to submit
proposals at the company's AGM, a shareholder submitted
around 100 humorous suggestions. They included one that
would have required company office toilets to be converted
back to Japanese traditional squat toilets, so that
managers could "toughen their legs and loins on a daily
basis" so as to increase the company stock price. He also
suggested renaming Nomura as Vegetable Holdings. ***Ed:
Although the suggestions didn't fly, we're sure they both
drew more than a few grunts of agreement amongst other
shareholders, given that Nomura's stock price has been
under JPY1,000 since 2008.** (Source: TT commentary from, Jun 1, 2012)

=> L'Oreal to increase manufacturing in Japan

It's good to see that French cosmetics firm L'Oreal has
sufficient confidence in Japanese manufacturing that it is
going to double production at its Gotemba, Shizuoka-ken
factory. The company says that its Asia-Pacific sales have
jumped 13% to JPY3.6bn Euros in FY2011, and it wants the
extra product for SE Asia and China. Apparently the Shu
Uemura brand has been particularly strong for L'Oreal, with
sales up around 20%. (Source: TT commentary from, Jun 2, 2012)

=> Online games companies see stock plunge

Just 3 weeks ago darlings of the Japanese stock market,
both DeNA and Gree are now seen as overpriced after a
government announcement that it would ban a lucrative part
of both companies' businesses, called "Complete Gacha". The
banned practice involved people buying virtual weapons and
tools at an online shop, but where the assets were provided
at random, thus introducing a gambling experience for the
gamer. ***Ed: We think the sell-off is over done, and that
both firms still have an incredible penetration and
understanding of the Japanese gaming market and are able to
create new flows of revenue.** (Source: TT commentary from, Jun 1, 2012)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.



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=> Onjuku Town and Beach -- A little bit of Latin in Chiba

Onjuku is close to Tokyo, therefore cheap and convenient,
but still has a lot to offer the casual traveler. The
little town harbors a unique culture; in 1609 a Spanish
galleon named the San Francisco ran ashore near Onjuku and
the surviving crew and captain were cared for by the
Japanese women of the town. They were later offered a ship
to return to Mexico. Now, tourists to the region can admire
a monolith, overlooking the sea, built to commemorate the
relationship between Mexico and Japan, but that’s not the
only Mexican influence you can see within the town. Cute
lobsters adorning sombreros are everywhere, along with a
cactus tree that welcomes beach-goers.

=> Jingu Shrine, Nature Museum, Miyazaki

With Miyazaki being blessed by a good climate, lovely
mountain scenery, and spectacular ocean views, many
tourists head right out of town as soon as they land. Yet
located only a short bus, train or taxi ride away from
Miyazaki station, the shrine is a must see for those in the
know. At the same time, the museum—located on the same
grounds, is often missed, as you have to make your way all
the around the park before you come to it.

The shrine is dedicated to Japan’s first Emperor Jimmu, who
most historians believe to have been a mythical figure. Set
in a cedar forest, the shrine’s buildings are almost all
constructed of cedar as well. One distinguishing feature of
the shrine (and that of the adjacent Gokoku Shrine) is the
presence of chickens wandering around the grounds. The
Shrine is popular with bird (and not just chicken) lovers,
and you can also see a 400-year old Wisteria in the Toshin


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