Japan Aims to Cut Company Tax to Spur Economic Growth

By Keiko Ujikane
BusinessWeek
Jun. 18, 2010

June 18 (Bloomberg) -- Japan’s government pledged to cut the nation’s tax on businesses and nurture the environment and health care industries as part of a plan to defeat deflation and end two decades of economic stagnation.

The government pledged in its medium-term economic plan today to bring the corporate tax rate down to a level “commensurate” with other leading nations. That rate is “about 25 percent,” Yosuke Kondo, parliamentary secretary for the Trade Ministry, said in an embargoed briefing yesterday. Firms in Tokyo pay a levy, including local taxes, of 40.7 percent.

Prime Minister Naoto Kan is seeking to restore Japan to 2 percent growth, end deflation and at the same time shrink the budget deficit to contain the world’s biggest public debt. Kan’s ruling Democratic Party of Japan yesterday signaled in its midterm election manifesto that sales taxes will be raised to strengthen the finances of the world’s No. 2 economy.

“The most important thing is to ensure fiscal reconstruction,” Shogo Ishii, director of the International Monetary Fund’s Asia-Pacific office, said in an interview in Tokyo yesterday. “Without it, a cut in corporate taxes won’t improve public finances, sparking concerns about market confidence.”

Kan yesterday vowed to curtail the debt, saying failing to do so could threaten the nation’s sovereignty by putting an international organization such as the IMF in charge of fiscal management. Since taking power this month, he has been advocating economic management centered on allocating taxes in a way that boosts jobs and social welfare.

Stocks Rise

The Nikkei 225 Stock Average rose 0.1 percent at 1:12 p.m. in Tokyo. The yen climbed for a fifth day against the dollar, trading at 90.86. Yields on Japan’s 10-year bond fell two basis points to 1.2 percent.

The government released the 2 percent economic growth target in December, and today’s plan aims to provide a road-map for achieving it. Kan is scheduled to unveil a separate fiscal rehabilitation strategy next week.

Attaining the growth goal may be challenging for a country with an aging population and deflation that has discouraged domestic demand. A 2 percent pace of expansion is four times the Bank of Japan’s estimate of the nation’s speed limit and almost double the 1.1 percent average rate recorded since an asset-price bubble burst in 1990.

Tackle Deflation

The strategy aims to halt the slide in consumer prices by the fiscal year ending March 2012. It seeks to avoid a surging yen and urges the Bank of Japan to “make utmost efforts” to end deflation.

“We need an appropriate response from both fiscal and monetary sides,” the document said. “We will try to avoid excessive yen gains and achieve economic growth that supports both domestic as well as external demand.”

Kan also aims for “stable gains” in prices, targeting an average 1 percent increase in the gross domestic product deflator through fiscal 2020. The gauge of price trends fell 1.7 percent in the year ended March 31, the most in seven years.

The strategy focuses on stimulating growth in seven areas including the environment and energy, health, technology and tourism. The Bank of Japan released a 3 trillion yen ($33 billion) plan this week that aims to encourage lending in similar areas, an effort that Governor Masaaki Shirakawa has said will complement the government’s growth effort.

Welcomed by Business

“We welcome the government’s growth strategy and support Prime Minister Kan’s pursuit of a strong economy, strong fiscal management and strong social security,” said Tadashi Okamura, chairman of the Japan Chamber of Commerce and Industry.

Koji Miyahara, president of the Japanese Shipowners’ Association, said this week that “lowering the corporate tax rate is necessary, and we must think of this as a complement to raising the sales tax.” The current company tax rate for Tokyo is higher than China’s 25 percent, Seoul’s 24.2 percent and France’s 33.3 percent, Finance Ministry data show.

A 10 percentage-point cut could add 1.1 percent to GDP in 10 years, Dai-Ichi Life Research Institute wrote on June 16. Still, the gain in growth would only make up for 64 percent of the decline in revenue otherwise obtained from companies, meaning the government would need to find alternative income sources, the Tokyo-based researcher said.

Economist Hiromichi Shirakawa said fiscal belt-tightening will weaken economic growth and the corporate tax proposal will be “powerless” to overcome the slowdown.

Limited Push

Cutting company levies “would have only a limited ability to stimulate capital investment and therefore a limited ability to push overall economic growth,” said Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo. He said the growth plan will be difficult to fund without tax increases because of the government’s commitment to restrict bond sales.

Kan’s Democratic Party of Japan wants cross-party talks on raising the country’s 5 percent sales tax, according to its platform for a July 11 upper house election released yesterday.

Finance Minister Yoshihiko Noda told reporters today that he will study the opposition Liberal Democratic Party’s proposal to double the consumption levy to 10 percent, echoing remarks made by Kan yesterday.

National Strategy Minister Satoshi Arai said today that the government isn’t planning to say how much the sales tax should be raised in the fiscal plan to be released next week.

The government also wants to lay the ground work to create a unified securities trading exchange by fiscal 2013, today’s document said. It will seek to double foreign direct investment and increase employment by foreign companies to 2 million from 750,000 by 2020. It pledged to reduce the overall unemployment rate to the 3 percent range “as early as possible.”

--With assistance from Toru Fujioka, Tatsuo Ito, Aki Ito, Mayumi Otsuma, Kiyotaka Matsuda, Sachiko Sakamaki and Takashi Hirokawa in Tokyo. Editors: Russell Ward, Lily Nonomiya