Japan's Abe To Dissolve Lower House, Change Tax Policy

     TOKYO (MNI) - Prime Minister Shinzo Abe said on Monday that he will

dissolve the Lower House on Thursday to call an early election in order to seek

voter views on a "drastic shift" in government policy toward using the planned

sales tax hike to fund new program spending totaling Y2 trillion.

     Abe defended his reflationary policy mix of aggressive monetary easing,

increased fiscal spending and structural reforms, saying more jobs have been

created since he returned to power in late 2012, although near-zero inflation is

far from the 2% he had promised to achieve.

     To continue his policy of completely overcoming deflation and supporting

sustained economic growth, Abe said the government will promote business

investment in technology and urge corporate efforts to raise productivity.

     The government will also implement free high school and university

education for qualifying students from low-income families in a bid to stop the

existing income inequality from widening the gap in access to higher education,

he said.

     As the working population continues to shrink, the government will also

provide fiscal support to child-rearing and care-giving while seeking to further

improve working conditions for care-givers, he added.

     Ahead of the Lower House election, which is expected to take place on Oct.

22, Abe promised to compile a Y2 trillion economic package to pursue his new

spending programs.

     "We must seek voter views on the drastic shift in the tax policy we are

going to make," he said, trying to justify the timing of calling an early

election. The next Lower House election must take place before mid-December

2018.

     The prime minister said he aims to win at least a majority, or 233 seats of

the Lower House, for the ruling coalition between his Liberal Democratic Party

and its small partner, Komeito. The lower chamber's 475 seats will be reduced by

11 as part of parliamentary reform for the next election.

     In April 2014, the sales tax was raised to the current 8% from 5% in order

to cut the nation's huge public debt, now more than double its GDP, and pay for

an increase in government funding of public pension plans.

     The second stage of doubling the sales tax rate to 10%, which has been

postponed twice by Abe in what opposition parties called a political move to

shore up his voter support, was aimed at reducing public debt.

     Initially, the government planned to spend Y4 trillion of the estimated tax

revenue increase from doubling the sales tax rate to 10% to pay down the debt

and Y1 trillion on improving social security programs.

     Abe said he has decided to change the plan and won't use much of the tax

revenue on repaying the huge public debt -- a move economists said would further

delay the process of fiscal consolidation and reduce the flexibility of fiscal

policy.

     A few hours before Abe's announcement on the fiscal policy shift and the

call for an early election, Tokyo Governor Yuriko Koike said she is launching a

new national political party to challenge the dominance of the ruling coalition,

promising to push ahead with economic reforms at a faster pace than Prime

Minister Abe.

     Koike, a former LDP member of the national Diet who in the past held

defense and environment cabinet portfolios, led a landslide win in July with her

reformist agenda for the metropolitan government, causing the LDP its worst-ever

defeat in the capital.

     "I'm launching a party on my own as the leader," she said, adding she is

"resetting" the preparation by her allies, Lower House members Masaru Wakasa and

Goshi Hosono -- the latter of whom quit the main opposition Democratic Party to

join the new force.

     The conservative politician said she will start the Party of Hope and "will

be directly involved in national politics," seeking reform-minded allies in the

Diet.

     But she quickly added that she will continue serving as the governor of

Tokyo to pursue her reform agenda, making the decision-making process more

transparent.

     Koike, 65, criticized Abe, 63, for planning an early Lower House election

next month, arguing there must be no political vacuum when geopolitical risks

remain high due to saber rattling between North Korea and the U.S. over

Pyongyang's nuclear arms threat.

     Koike also said Abe has been too slow in embarking on fiscal and other

economic reforms. She also said Abe's growth strategy was insufficient.

     Opposition parties are accusing Abe of avoiding parliamentary

investigations into political scandals by dissolving the Lower House at the

start of the Diet session on Thursday.

     Abe is taking advantage of the fragmented opposition camp. The main

opposition Democratic Party has seen a senior party member defect to form a new

party. The DP's new leader, Seiji Maehara, is also cautious about continuing to

team with the Communist Party, which has gained popularity in recent elections.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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