Japan Considers Scrapping Planned Corporate Tax Reduction

Japan Weighs Scrapping Company-Tax Cut
An excavator works on a bridge damaged by the earthquake and tsunami in Rikuzentakata, Iwate prefecture. Photographer: Tomohiro Ohsumi/Bloomberg

Japan’s ruling party is considering abandoning a proposed corporate-tax cut and boosting levies on individuals to help pay for earthquake reconstruction and reduce the need to step up bond sales.

Prime Minister Naoto Kan said today more than one spending package may be needed for rebuilding, and all revenue options will be debated. Vice Finance Minister Fumihiko Igarashi said yesterday the government may scrap a planned 5 percentage-point reduction in company tax rates, and the head of the party’s fiscal committee last week advocated a sales-tax increase.

Increasing taxes would risk deepening the hit to economic growth in the aftermath of the nation’s record earthquake and ensuing tsunami on March 11. Some legislators have instead advocated that the Bank of Japan buy debt directly from the government to pay for the reconstruction.

“A tax increase will likely dampen personal consumption when household sentiment has already cooled,” said Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting Co. in Tokyo. He also said that “if the government totally calls off a corporate tax cut, not temporarily abandons it, it could accelerate the risk of the hollowing out of Japan” as manufacturers shift operations abroad.

Toyota, Sony

Company earnings are likely to be impaired by the catastrophe, which forced firms from Toyota Motor Corp. to Sony Corp. to suspend factories in the devastated northeast and elsewhere as supply chain and power disruptions spread. The Nikkei 225 Stock Average fell 1 percent to 9,385.98 at 12:56 p.m. in Tokyo. It has lost about 10 percent since the temblor.

“We can’t avoid raising taxes as the great earthquake may worsen an already dangerous fiscal situation,” Ikkou Nakatsuka, the deputy chairman of the Democratic Party of Japan’s tax committee, said in an interview last week. Shinichiro Furumoto, director-general of the party’s fiscal committee, said “only the consumption tax imposes the burden equally among citizens.”

Kan said that while “right now” he isn’t thinking about a tax increase, “we need to discuss various possibilities.” He said in parliament today that the government will review plans including the company-tax reduction and tax breaks on dividends and stock trading.

The prime minister may avoid a political cost from the tax measures, as 67.5 percent of the public support higher levies to fund reconstruction, according to an opinion poll released by Kyodo News two days ago. A tax increase may help to push back the possibility of a future fiscal crisis with public debt already about twice the size of the $5 trillion economy.

Bond Limit

Japanese Economic and Fiscal Policy Minister Kaoru Yosano said today that government bond sales are close to the limit.

The government estimates damage from the disaster, which left more than 27,000 people dead or missing, at as high as 25 trillion yen ($306 billion).

Japanese government data released today suggested that the economy was recovering in February before the quake struck this month. The unemployment rate unexpectedly fell to 4.6 percent from January’s 4.9 percent, according to the statistics bureau in Tokyo. The number of available jobs rose to the highest level in two years, and retail sales increased last month.

Goldman Sachs Group Inc. today said Japan’s economy will shrink next quarter and lowered its growth forecast for the year starting April 1 to 0.7 percent from 1.3 percent.

Consumption Tax

To raise about 5 trillion yen a year for the reconstruction, Nakatsuka has suggested a two-percentage point increase in the sales tax rate, currently at 5 percent.

It would be the first increase since 1997, when the sales levy was raised from 3 percent. The economy fell into a recession after the increase and the then ruling Liberal Democratic Party lost an election as a result. Mentioning a possible increase in the tax was one reason Kan’s DPJ lost control of the upper house in a national ballot last year.

To secure more funds, the government may forego the planned reduction in the corporate tax rate, Igarashi told reporters yesterday. The levy cut, which was supposed to begin in the year starting April 1, would have decreased revenue by between 1.4 trillion yen and 2.1 trillion yen, according to calculations by the Ministry of Finance.

The company tax rate in Tokyo is 40.69 percent, compared with 28 percent in the U.K. and 25 percent in China, according to the ministry’s data.

‘Fine With Me’

“If this will lead to a speedy reconstruction, personally it’s fine with me if the tax reduction is scrapped,” Hiromasa Yonekura, chairman of the Keidanren, Japan’s largest business lobby, told a news conference yesterday

Some other lawmakers in both the ruling and opposition parties are against tax increases, saying such steps would damage private demand already depressed by the disaster.

“There’s no way that taxes can be increased when there’s deflation,” Kozo Yamamoto, a member of parliament with the opposition Liberal Democratic Party, said in an interview last week.

He instead called for a 20 trillion yen rebuilding program financed by Bank of Japan debt purchases. A group of ruling-party lawmakers submitted a similar proposal to Noda this month, DPJ member Yoichi Kaneko said in a blog post.

The LDP’s leader, Sadakazu Tanigaki, appears to disagree with Yamamoto’s views, as he said this month that he proposed to Kan a temporary tax to help fund the relief effort.

Moody’s Investors Service said after the quake that Japan may eventually reach a fiscal “tipping point” if investors lose confidence in the soundness of public finances and demand a risk premium on government bonds.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE