Abe Plans Corporate Tax Cut in 2015 as Kuroda Warns on Finances

Japan’s Prime Minister Shinzo Abe said he aims to start cutting corporate taxes in 2015, reaching agreement with senior lawmakers on a core part of his agenda as the central bank kept up pressure for sustainable finances.

Abe, speaking to reporters in Tokyo yesterday after a meeting with Finance Minister Taro Aso and Economy Minister Akira Amari, said the plan would bring the rate under 30 percent in a few years. He said other revenue sources will be secured for the move, which requires approval from the Diet.

A lower levy is the centerpiece of Abe’s latest initiative to boost growth, which is now the main focus of economic policy with the Bank of Japan maintaining unprecedented easing. Failure to find extra funds to offset the blow to revenue would risk worsening the world’s largest debt burden.

“Cutting corporate taxes is a move in the right direction but it won’t necessarily trigger economic growth,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. “It is absolutely necessary to secure alternative tax revenue as the government’s finances are deteriorating.”

After holding policy at yesterday’s meeting, Kuroda stressed the need for the government to put its finances on a healthy footing.

“It’s an essential precondition for sustainable growth of the Japanese economy to establish a sustainable fiscal structure,” Kuroda told reporters. The BOJ “strongly hopes” for steady implementation of steps toward fiscal consolidation, he said.

High Level

Chief Cabinet Secretary Yoshihide Suga said yesterday it’d be best to lower the tax to less than 30 percent “as soon as possible.”

Japan’s corporate levy of about 35 percent is the second highest among Group of Seven nations. It compares with levels of about 24 percent in South Korea and 23 percent in the U.K., according to Japanese finance ministry data.

The prime minister is set later this month to finalize details of the latest phase of the so-called third arrow of Abenomics, which will aim to overhaul labor regulations, agriculture and other areas to raise the economy’s potential. The plan will involve promotion of integrated resorts, including casinos, Fuji TV reported yesterday.

Improving Lives

The company tax cut will be “growth-orientated” and “will help create jobs and improve peoples’ livelihoods,” Abe told reporters at the Prime Minister’s Office yesterday.

Kuroda flagged the potential boost to growth from lower taxes on company profits.

“It is a common analytical view that this would have an effect on promoting capital investment and investment in R&D, and promote economic growth,” Kuroda said. At the same time, the government needs to consider the impact on the deficit, and whether there are tax increases or spending cuts to replace the lost revenue, he said.

In a draft of its basic economic plan released yesterday, the government said it would aim to reach a surplus in its primary balance by fiscal 2020, and conduct a thorough review of social security policies to contain costs.

The BOJ’s easing is helping to spur a recovery as the government seeks to straighten its finances. The central bank will continue “open-ended” easing as long as necessary to achieve its target of stable 2 percent inflation, Kuroda said yesterday.

Japan’s debt will equal 244 percent of the economy by the end of 2014, the International Monetary Fund estimated in April.

Abe has tried to counter the rising debt by lifting the sales tax by 3 percentage points in April -- the first increase since 1997. In yesterday’s draft plan, the government said it will decide by the end of the year whether to proceed with a further 2-point increase in October 2015.

Fitch Ratings urged the government to go ahead with the hike.

“If they don’t raise the consumption tax, there’s no Plan B in terms of stabilizing the public debt ratio and bringing down the budget deficit,” Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch, said yesterday in a telephone interview.

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