LDP Secretary-General Sadakazu Tanigaki, left, and his Komeito counterpart Yoshihisa Inoue are pictured at a news conference in Chiyoda Ward, Tokyo, on Dec. 12, 2015, after the two parties agreed on a reduced consumption tax rate. (Mainichi)

Sadakazu Tanigaki, secretary-general of the ruling Liberal Democratic Party (LDP), threw Dec. 10 ruling coalition consultations on a reduced consumption tax rate into chaos when he insisted that foods served at restaurants be subject to the lower rate.

The governing bloc comprised of the LDP and Komeito had broadly agreed that a reduced consumption tax rate should apply to foodstuffs, except for liquor and meals served and eaten out, when the ordinary consumption tax is raised from the current 8 percent to 10 percent in April 2017. The measure would reduce the tax burden on consumers by about 1 trillion yen.

LDP policymakers who place priority on securing sufficient tax revenue had initially intended to apply a lower tax rate to only perishable foodstuffs, cutting some 400 billion yen in the public's tax burden, which the government has set to make up for from other sources.

However, the prime minister's office, which attaches greater importance to its relations with Komeito, pushed for a reduced rate on perishable and processed foodstuffs, resulting in about a 1 trillion yen tax cut, which the LDP ultimately swallowed.

When Tanigaki abruptly demanded that meals eaten out also be subject to a lower tax rate, for which 1.3 trillion yen would be necessary, speculation spread within the coalition that it was a tricky move to overturn the prime minister's office's proposal.

Actually, Tanigaki's demand was in response to a request from the Finance Ministry's Tax Bureau, which wanted to avoid confusion in distinguishing between foods subject to a lower tax rate and those that are not, such as delivered and take-out foods.

However, the ministry's Budget Bureau was taken aback by the demand by Tanigaki, who once served as finance minister, because such a request meant that the bureau would lose further tax revenue amid fiscal difficulties. The Budget Bureau urged the Tax Bureau to reconsider the idea. However, the Tax Bureau, which directly negotiates with the ruling bloc over tax policy, had been the very party that had persuaded Tanigaki and other top LDP officials to accept the idea.

In response to the conflict within the Finance Ministry, the prime minister's office instructed the ministry to agree on a 1 trillion yen cut, and the Tax Bureau retracted its assertion.

The LDP's Research Commission on the Tax System previously had absolute authority over tax system reform, with support from the Tax Bureau. This time, however, top officials in the prime minister's office, including Chief Cabinet Secretary Yoshihide Suga, made a decision on a reduced consumption tax rate at their own discretion, thereby playing a leading role in settling the dispute.

The settlement represents defeat for the Finance Ministry as the scope of items subject to a lower consumption tax rate has expanded and state finances are expected to further worsen. Japan's fiscal situation is the worst of all developed countries, as the country's debts exceed 1,000 trillion yen.

The ministry's defeat is attributable to its misjudgment of moves by the prime minister's office. The government began in 2012 to consider introducing a lower tax rate through agreement among the LDP, Komeito and the now largest opposition Democratic Party of Japan (DPJ).

Nevertheless, the Finance Ministry believed even in early 2015 that the attempt to introduce a reduced tax rate would fail. The business community was opposed to the plan because it would increase business operators' clerical burden as they would need to introduce invoices detailing the consumption tax rate and tax amount for each item they sell.

A source close to the ministry had said the plan "wouldn't win the understanding of business operators, and could never be implemented."

Ministry officials appeared to be taking the steps necessary to adopt a reduced tax rate as a formality, but were actually trying to block the introduction of such a tax rate.

When Komeito deliberated a plan to apply a lower rate only to perishable foodstuffs, ministry officials presented data showing that lower income earners tend to frequently buy processed foodstuffs, and proposed that processed foods should also be subject to a reduced rate.

Since 800 billion yen to 1.3 trillion yen would be needed to include processed foodstuffs in the items subject to a lower tax rate, the ministry expected ruling coalition consultations on the issue to become deadlocked, since there were no prospects of securing such a large amount of funds.

The LDP's Research Commission on the Tax System, which was working closely with the Finance Ministry, clashed fiercely with Komeito, which demanded that processed foods be subject to a reduced tax rate, increasing the tax cut to around 1 trillion yen.

However, the prime minister's office, which placed utmost priority on election cooperation between the LDP and Komeito in the summer 2016 House of Councillors election, sided with the coalition partner as talks neared their end, and demanded that the scope of items subject to a lower tax rate be expanded to include processed foodstuffs. The move came as a surprise to the ministry.

A high-ranking official of the Finance Ministry had repeatedly expressed concerns earlier this month that the ministry would be defeated by the prime minister's office as the ruling coalition consultations on the issue entered a crucial stage.

The consumption tax was increased from 5 percent to the current 8 percent in April 2014, and is scheduled to be raised to 10 percent in April 2017. An increase in tax revenue resulting from the 5 to 10 percent hike, estimated at 14 trillion yen, is set to be used solely to cover social security expenses. If the consumption tax levied on foodstuffs is kept at 8 percent come April 2017, this amount will decrease substantially.

As such, for the Finance Ministry, which had planned to balance the budget based on the assumption that the consumption tax rate would be raised to a uniform 10 percent, the introduction of a reduced consumption tax rate is not a freeze of the tax rate but effectively a tax cut.

The top bureaucrat at the ministry and Suga had an argument over the reduced tax rate.

"I'm absolutely opposed to the plan," said Kazuho Tanaka, vice finance minister.

"Why is the Finance Ministry opposed to the plan? Won't you please support it?" Suga said.

Top ministry officials had trusted that even Suga, who attaches particular importance to election cooperation between the LDP and Komeito, would not fully comply with the coalition partner's request.

"State finances would be ruined. Are they (senior officials of the prime minister's office) prepared for that?" said another high-ranking official of the ministry.

However, Prime Minister Shinzo Abe instructed Tanigaki on Dec. 9 to reach an intraparty consensus on a plan that would be acceptable to Komeito. Suga was also present at the meeting. It was the moment of the Finance Ministry's decisive defeat.