Japan should lower its effective corporate tax rate to Germany’s level, around 29 percent, to help bolster growth, according to one of Prime Minister Shinzo Abe’s top economic aides.
“The effective rate should be lowered to the global standard of advanced economies,” Etsuro Honda, 58, said in an interview at the Prime Minister’s office in Tokyo yesterday. A reduction in the rate, estimated by the Organization for Economic Cooperation and Development at 37 percent, should be included in the reforms Abe plans to help revive the nation’s economy after two decades of stagnation, according to Honda.
With monetary and fiscal stimulus already under way, the government’s focus is shifting to efforts to persuade companies -- which are sitting on near-record cash holdings -- to boost investment and wages. Honda said that salary rises in excess of 1 percent are needed in spring 2014 wage negotiations, and that compensation gains are “essential for the success of Abenomics.”
Honda, who advised Abe on his pick for governor of the Bank of Japan and advocated that he adopt ending deflation as a policy priority, offered companies little hope of relief from labor regulations that limit their ability to fire workers. He said the government should put off any such deregulation until at least 2015.
“Next year will be too early for us to decide,” on such a step, Honda said. “We need another one and half years so we can at least get out of deflation and reach an inflationary macroeconomic environment, then the conditions would be ready for us to revise regulations that protect regular staff.”
Abe’s stimulus measures have weakened the yen and helped corporate profits, and his challenge now is to deliver on pledges to reduce business regulations and sustain growth. Five-decade-old labor rules based on lifetime employment are ripe for overhaul, according to Robert Feldman, head of Japan economic research at Morgan Stanley MUFG Securities Co.
The Bank of Japan in April unleashed unprecedented monetary easing in its bid to reach its target of 2 percent inflation within a time-frame of about two years.
Honda, a friend of Abe for about 30 years, said yesterday that the central bank should be prepared to step in if needed after the introduction of a 3 percentage-point sales-tax increase in April. Gross domestic product is forecast to contract an annualized 4 percent in the second quarter next year, according to the median estimate of 26 economists surveyed by Bloomberg News.
“The Bank of Japan will do more aggressive easing in the case that real GDP plunges deeper than we expected after April,” Honda said. Any decision on further central bank stimulus would probably have to wait until after growth data comes out for the April-June period, he said. Such figures are due in August.
Mortgage-backed securities are a candidate for the BOJ to purchase, in addition to Japanese government bonds and riskier assets such as exchange-traded funds, Honda said. The BOJ today releases updated projections for the nation’s economy, and is forecast by economists to leave its policy stance unchanged. Governor Haruhiko Kuroda is scheduled to brief reporters after the decision in Tokyo.
Japan’s corporate tax rate is among the highest in major developed economies, according to the Paris-based OECD. “The corporate tax rate in Germany and France is moderate and acceptable, but we should avoid the race to the bottom,” Honda said.
Honda advocated a rate similar to that in France and Germany, which he estimated around 29 percent. OECD data show Germany’s rate at 30.2 percent and France at 34.4 percent.
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