Following political gridlock in the Japanese parliament, a “temporary” tax on petrol (gasoline) that has been in force for three decades after being renewed every couple of years is set to expire on 01 April 2008 (to readers outside of Japan: No, this is not an April Fool’s joke). As a result prices of petrol are set to fall by 25 yen per litre (about US$0.95 per gallon, EUR 0.16 per litre).

I’m utterly unimpressed by how both major Japanese parties have handled this conflict.

Fuel taxes in Japan consist of the basic fuel tax and a “temporary” but de-facto permanent surcharge. The ruling conservative Liberal Democratic Party (LDP) wanted to hold on to the surcharge, as well as to a peculiar rule that fuel taxes must only be used for road construction and repair. This road-use-only restriction was defended by the so-called “road tribe”, an informal group of politicians with cozy ties to construction companies which in turn support their election campaigns.

The opposition Democratic Party, which controls the less powerful Upper House of parliament, called for dissolving the fuel – road construction link, as well as abolishing the surcharge altogether and only keeping the basic fuel tax, as it was until the 1970s.

The two did not compromise in time before the set expiration date and so prices will fall from tomorrow. Most likely the Lower House, which is controlled by the LDP-led coalition, will override the Upper House about one month later and reimpose the higher tax rate. Meanwhile Prime Minister Fukuda offered to remove the road construction link from April 2009 in order to get the opposition to agree to an extension of the surcharge.

While motorists will welcome cheaper fuel, petrol stations are likely to collectively lose about US$200 million over night, as they hold stocks of some 800 million litres of petrol in their underground tanks on which the tax has already been paid and which will not be refunded to them. Motorists are likely to give their business to whatever petrol station that starts selling at the new low prices first, making it near impossible for other stations to pass on to the consumer the taxes these stations have already paid on stocks delivered before April.

To me it makes no sense to maintain the outdated restriction on how fuel taxes can be used, which serves primarily the interests of construction companies, not the general public. Japan as an aging society with a declining population will need more and more cash for supporting elderly people and their health care, not more and more roads. Why can’t taxes be used where they are needed the most? This pork barrel restriction should have been abandoned a long time ago!

On the other hand it would be irresponsible to cut fuel taxes while the government is running a huge budget deficit. It would just mean more red ink, piling up higher debts to be repaid by our children and grandchildren. Also, cheaper fuel today will do little to encourage consumers to switch to more economical cars or public transport and to cut their output of greenhouse gases. Japan is already way behind on its efforts to meet its obligations under the Kyoto climate treaty.

It would make more sense to maintain and even raise fuel taxes and use the revenue to subsidise CO2 conservation measures, from better home insulation to solar collectors for warm water and subsidies for hybrid cars. Thirty years from now the world will live on maybe half the crude oil output per year as today, shared amongst more consumers. Whatever country comes up with intelligent solutions for living with scarce and expensive oil will do best in the 21st century. Trying to sneak back into a “golden age” of cheap fuel is not the way to succeed.