Abe Ally Favors Company-Tax Cut to Ease Sales-Levy Rise: Economy

Prime Minister Shinzo Abe’s coalition partner sees corporate-tax cuts as a way to counter any economic fallout from a planned increase in a sales levy aimed at shoring up the nation’s finances.

“A corporate-tax reduction is one method” of offsetting the impact from a two-stage plan to double the consumption tax, Tetsuo Saito, deputy secretary general of the New Komeito party, said in an interview yesterday in Tokyo. “The effective corporate-tax rate needs to be lowered at some point, so an early implementation is one option.”

Nomura Securities Co. says the corporate levy should be cut, while the industry ministry this week said a reduction was an “important issue.” Bank of Japan board member Yoshihisa Morimoto said today that growth will exceed its potential rate even with a sales-tax increase, and Japan needs to maintain trust in its finances to avoid higher yields on government debt.

“It’s important for the government to raise the consumption tax as scheduled to show its resolve in tackling fiscal reconstruction,” said Saito, who heads Komeito’s tax commission. “The government will also compile and submit an extra budget to parliament at the start of the next session in January to prop up the economy.”

Saito didn’t provide details about what other stimulus could be included in a supplementary budget.

On coming to power in a landslide election victory in December, Abe inherited a plan to raise the sales tax to 8 percent in April from the current 5 percent, followed by a bump to 10 percent in October 2015.

Urging Caution

Abe advisers Etsuro Honda and Koichi Hamada have urged caution on lifting the sales tax. Hamada this week called for an incremental rise by 1 percentage point a year.

Both aides are appearing this week on panels to discuss the effects of boosting the rate. Sixty people including economists, executives and consumer advocates will give opinions to the government on the panels sitting through Aug. 31.

Abe will make the final decision on the tax by early October and plans to take into account both views of the panels and data including revised gross domestic product for the second quarter, due Sept. 9. A preliminary report on Aug. 12 showed the economy expanded an annualized 2.6 percent in that three-month period.

Data released by Japan’s trade ministry today showed retail sales fell 1.8 percent in July from the previous month, compared with economists’ median estimate for a 1 percent decline. A drop in auto sales contributed to the slide, the ministry said.

Auto Sales

“Auto sales have been on a slight negative trend over the last few months as people are waiting to see what will happen with the sales tax and what measures the government introduces for the auto industry,” said Junko Nishioka, chief economist at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan official. She said that while the indicator is volatile, consumption is still on a “mild recovery trend.”

Azusa Kato, an economist at BNP Paribas SA in Tokyo, said economic growth may slow this quarter.

“The recovery in consumption may lose momentum and exports are looking a bit weak because demand in the emerging economies, especially China, is weakening,” she said. “Still, consumption may rebound in the fourth quarter and the first quarter of next year due to last-minute buying before the planned sales-tax increase.”

Elsewhere in Asia, the Philippine economy expanded above 7 percent for a fourth straight quarter, defying a regional slowdown to cement its role as Southeast Asia’s best performer.

Europe will see reports on French business confidence, unemployment in Germany and Denmark and inflation in Germany. The U.S. government is likely to revise its estimate of second-quarter growth to a 2.2 percent annualized pace from a previously reported 1.7 percent, based on the median projection of analysts surveyed by Bloomberg.

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