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Finance Minister Naoto Kan’s readiness to debate Japan’s first sales-tax increase since 1997 signals the risk of a fiscal crisis may be weighing heavier with policy makers than dangers to economic growth.

A government tax panel convenes in coming weeks to review changes and hear recommendations of a private-sector board, after Kan last month urged discussing the sales levy. He had previously focused on spending cuts, and Prime Minister Yukio Hatoyama pledged not to alter the 5 percent tax for four years.

The shift underscores how Japan is seeking to avoid any association with the crisis in Greece, which has a smaller debt burden. Lifting taxes on consumers is politically risky — the Obama administration isn’t considering such a levy in the U.S. even as two former central bank chiefs endorsed the concept — and the last time Japan did so, it helped cause a recession.

“Japan’s fiscal situation is reaching a very dangerous point,” said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo. “They have to start talking about the sales tax even though the topic has been taboo and provokes traumatic memories among politicians.”

Consumption taxes offer the simplest way of raising revenue in economies where more than half of gross domestic product comes from spending. India’s government boosted excise taxes in its budget proposal last week and New Zealand is considering an increase in its tax.

Kan’s ‘Handstand’

When assuming the post on Jan. 7, Kan indicated he wouldn’t raise taxes until cutting spending to the point where wasteful outlays couldn’t be found even when “doing a handstand.” He changed gears a month later as Standard and Poor’s threatened to cut Japan’s AA sovereign rating and Greece’s public finances deteriorated.

Kan’s deputy, Naoki Minezaki, said discussion about sovereign debt at a Group of Seven meeting of finance ministers in Canada last month made his boss realize the importance of mapping a plan to contain the nation’s public debt.

The Finance Ministry’s debt projections and S&P’s outlook cut also propelled Kan to spur debate on taxes, according to two finance ministry officials who spoke on condition of anonymity.

“I have a feeling that he senses we don’t have much time,” Minezaki told reporters on Feb. 15. Public debt is projected to swell to a record 973.2 trillion yen by next March, and the Finance Ministry anticipates it will get more cash from bond sales than tax revenue for the first time in 63 years in the fiscal year ending this month.

Record U.S. Gap

In the U.S., which will see a projected record budget deficit of $1.6 trillion this year, the Obama administration isn’t considering a consumption tax free credit report and score.

“It’s the only thing that raises revenue in significant quantities without significantly impacting on the economy,” former Federal Reserve Chairman Alan Greenspan said in an August interview on ABC television. Paul Volcker, Greenspan’s predecessor, also endorsed some tax on consumption and House Speaker Nancy Pelosi and Senate Budget Committee Chairman Kent Conrad both have supported considering a VAT.

Even so, Peter Orszag, head of the White House Office of Management and Budget, said in a November interview with Bloomberg Television there’s no “serious policy discussion” of a VAT. The White House position hasn’t changed, an administration official said on condition of anonymity this week.

Share of Revenue

In Japan, the consumption tax accounts for a quarter of total revenue. A one percentage point boost would secure about 2.5 trillion yen, according to government estimates.

Hatoyama’s administration also needs to come up with 12.6 trillion yen next fiscal year to fund election pledges including childcare handouts and farmer subsidies.

Japan’s debt to GDP ratio is estimated to rise to twice the size of the economy this year, compared with Greece’s 123 percent, according to the Organization for Economic Cooperation and Development.

A deteriorating fiscal situation hasn’t spurred an increase in Japan’s benchmark bond yields yet, with 10-year securities yielding 1.3 percent — the lowest among G-7 nations because of the economy’s deflation. Bank of Japan Governor Masaaki Shirakawa said yesterday that investor trust in fiscal and monetary policy has also helped keep yields low so far.

“Japan is worse than Greece if you only look at figures,” said Takeshi Minami, an analyst at Norinchukin Research Institute Ltd. in Tokyo. “No one knows when yields will start to rise because of concerns about the debt.”

Hashimoto’s Folly

Japan’s sales tax was introduced in 1989 and raised to 5 percent in 1997. The increase pushed the nation into a 20-month recession and caused then Prime Minister Ryutaro Hashimoto’s Liberal Democratic Party to lose a majority in the lower house of parliament for the first time.

The nation’s sales tax is the lowest among the 30 Organization for Economic Cooperation and Development members, except the U.S. — which has no levy at the national level, although some of its states do.

“The government will continue to lose money every year unless they change the tax system and cut expenditures,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo.

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