Prime Minister Shinzo Abe’s victory in yesterday’s election solidifies his control over the Japanese government and gives him a freer hand to carry out economic reforms. Japan’s business leaders have a wish list for him.
Executives would like Abe to use his newfound power to cut corporate taxes, ease regulations, loosen labor laws and join an international free-trade agreement, calling such steps the most promising way to build on efforts to get the world’s third-largest economy growing again after two decades of stagnation.
“We need to be on an equal footing with competitors overseas,” Norio Sasaki, vice board chairman at Toshiba Corp. (6502), said at a gathering of industry leaders last week in Karuizawa, northwest of Tokyo. “The government needs to take steps to remove customs barriers, such as through the Trans Pacific Partnership agreement, and reduce corporate taxes.”
The Japanese yen and stocks both rose after the Liberal Democratic Party election victory, which gives it an outright parliamentary majority and bequeaths Abe the clout to push through economic reforms and deregulation. The LDP and partner New Komeito gained at least 74 of the 121 seats up for grabs in the 242-seat upper house. The coalition now controls both legislative chambers, called the Diet, for the first time since 2007 and need not face another election for three years.
Renaissance in Growth
“The new government should seize the opportunity to drive a renaissance in Japan’s growth,” Shinichiro Ito, Chief Executive Officer of airline ANA Holdings Inc. (9202), said in an e-mailed statement. “I hope they will move forward speedily.”
Japan’s currency strengthened 0.6 percent to 100.01 yen versus the dollar as of 5:07 p.m. in Tokyo. The Nikkei 225 Stock Average closed 0.5 percent higher.
“I welcome the end of a split Diet,” Toshifumi Suzuki, Chairman of retailer Seven & I Holdings Co., said in a faxed statement. “I look forward to seeing how the third arrow of Abenomics growth strategy is put into action with this decision-making power.”
Among the burdens reducing the incentive for Japanese companies to invest at home is the second-highest level of effective corporate taxes in the Group of Seven nations, executives say. The nation’s 35.6 percent corporate tax rate compares with 25 percent in China and 17 percent in Singapore, according to the Ministry of Finance. Only the U.S. has a higher rate at 39.1 percent, according to Organization for Economic Cooperation and Development data.
“We want corporate taxes in line with other nations,” Hiroshi Tomono, chairman of the Japan Iron and Steel Federation and president of Nippon Steel & Sumitomo Metal Corp. (5401), said in Karuizawa.
Abe said this month he wants to discuss cutting the corporate tax rate, without giving details before the election.
Toshiba’s Sasaki said Abe should consider lowering the rate to as low as 20 percent.
“The Japanese government should place priority on reforming taxes,” Takashi Kawamura, chairman of Hitachi Ltd. (6501), Japan’s second-largest manufacturing company, said in Karuizawa.
Lower corporate rates may draw criticism from voters, who are facing a higher tax burden as Japan plans to increase the national consumption tax in April, for the first time in 17 years, to 8 percent from 5 percent.
Abe said July 4 it’s necessary to increase the consumption tax because of rising social-security costs and the nation’s debt burden. At the same time, raising the tax risks choking off an economic recovery by damping consumption. The prime minister has said he’ll consider economic conditions when making a final decision.
“The consumption tax needs to be increased to save Japan’s balance sheet,” Yorihiko Kojima, chairman of Mitsubishi Corp. (8058), said in Karuizawa.
Abe may be able to reduce opposition to a corporate tax cut by focusing on incentives first, said Masahiro Sakane, a senior adviser for Komatsu Ltd. (6301) and vice chairman of the Keidanren, Japan’s biggest business lobby.
“The government could support companies intending to shoulder the risk of investments in facilities by offering tax breaks,” Sakane said. “Reducing corporate taxes could wait until after seeing the impact of such tax breaks.”
The prime minister has pledged to spur capital spending in the world’s third-largest economy back to the level before the 2008 financial crisis, and to increase support for companies operating overseas. He has promised a legislative campaign to loosen rules on businesses, ranging from non-prescription drugs to construction.
The Keidanren business lobby is also urging reform of the labor market to promote a shift of the workforce to growth industries and harnessing diversified talent, it said in a policy statement in May.
Japan’s industrial expansion in the 1960s and 1970s was underpinned by the so-called three major labor practices of lifetime employment, the seniority system and corporate labor unions. Japan ranks 134th out of 144 nations in terms of ease of hiring and firing, according to the World Economic Forum’s Global Competitiveness Report in 2012.
The labor system “is a little too rigid when companies try to improve competitiveness,” Fumio Ohtsubo, Panasonic Corp. (6752)’s former chairman, said in April.
Japan’s government is also planning to join talks on the Trans Pacific Partnership regional trade deal as soon as this month. The negotiations are aimed at eliminating tariff barriers between the member countries in a region the U.S. says accounts for more than 40 percent of world trade.
Joining the TPP would boost Japan’s gross domestic product by 3.2 trillion yen ($32 billion) while cutting farm and marine production by 3 trillion yen, according to a government estimate.
TPP member countries plan to complete negotiations by the end of the year, according to a trade ministers’ statement in April.
“The government needs to get growth going and inflation going and wages up,” said Thomas Zengage, chief executive officer of think tank Pacific Communicators Inc. “ The big structural reform is TPP.”
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