Prime Minister Shinzo Abe’s drive to lower the nation’s corporate taxes gained ground as ruling party lawmakers signaled support for the flagship growth policy.
Takeshi Noda, head of the Liberal Democratic Party’s tax panel, told reporters after a meeting yesterday in Tokyo that “we’re proceeding on the premise” that changes to corporate tax will become party policy. Panel member Yoichi Miyazawa said “many” of those at the meeting supported a cut.
Endorsement by ruling party tax officials would remove a source of resistance to Abe’s plans to lower a levy that is the second-highest among Group of Seven nations. The focus is set to shift to the size and timing of the cuts and ways to find other funding to ease the impact on the finances of a government shouldering the world’s largest debt burden.
“Investors want to see the pace of cuts, how far the rate would be cut and by when, as well as how alternative revenues are secured,” said Hidenori Suezawa, an analyst at SMBC Nikko Securities Inc. in Tokyo. The LDP’s stance “almost certainly removes the chance that corporate tax cuts won’t happen.”
Many members at the meeting urged an expansion of the tax base, Miyazawa told reporters yesterday, indicating they see the need to offset the loss of revenue from any cut in the corporate levy.
Bank of Japan Governor Haruhiko Kuroda told the Council on Economic and Fiscal Policy yesterday he is concerned about proceeding with discussions on cutting the tax without finding alternative revenue.
The government can’t postpone its target to reach a primary balance surplus in the budget for the year starting April 2020, Finance Minister Taro Aso said in a submission to Abe’s key economic advisory council, according to a document obtained by Bloomberg News. Both revenue and spending need to be improved, and even if the fiscal position in 2015 is better than forecast, any extra money shouldn’t be used for tax cuts or increased spending, Aso wrote.
At about 35 percent, Japan’s effective corporate tax rate is the second-highest in the G-7 after the U.S. and compares with a levy of about 24 percent in South Korea.
The government’s tax panel, which reports to Abe, plans to make a final proposal by next month on the issue. In a statement summarizing past meetings, it said that lowering the rate is an “inevitable” issue to secure growth, and that broadening the tax base is necessary.
Abe has called for changes to Japan’s corporate taxes to boost the country’s competitiveness. His administration is preparing to unveil next month the next stage of his growth initiatives to complement monetary and fiscal stimulus that jolted the economy out of a 15-year deflationary slump.
Investors are waiting to see the strength of the so-called Third Arrow of Abenomics, structural changes to boost growth potential of the world’s third-biggest economy.
Kuroda, who introduced unprecedented stimulus in April last year, has stepped up pressure on Abe to deliver. The government and companies need to make efforts to spur growth, Kuroda said May 21.
BOJ Deputy Governor Kikuo Iwata said this week an economy “with low real growth rates under mild inflation” is possible without effective measures to boost the economy’s potential.
That task is for the government “which is equipped with policy tools including regulatory reform,” Iwata said. The BOJ has “high expectations that the government will continue to make further progress in its growth strategy in order to strengthen the growth potential of Japan’s economy.”