Abe Pledges Corporate Tax Cut as Investments Slump

Updated on
  • Prime Minister sticking to plan to reduce business rate
  • Japan's corporate levy second highest among G-7 Nations

Japanese Prime Minister Shinzo Abe pledged to follow through with a corporate-tax cut, a day after government data underscored businesses’ reluctance to ramp up domestic investment.

In a message read out at a Bank of America Merrill Lynch event in Tokyo, Abe said that he would lower the effective corporate tax rate by at least 3.3 percentage points "next year" and will "aim to go beyond that if possible."

Abe spokesman Kenko Sone said that Abe’s comments signaled no change in policy, and the message may not have been clearly expressed. Some of the reduction that Abe referred to has already been implemented, and the rate will fall to 31.33 percent in the fiscal year starting April 2016 from 34.62 percent in fiscal 2014, according to the Ministry of Finance website.

"We will push forward in reducing the rate down into the twenties over several years, bringing it to a level that compares favorably in the international context," Abe said. "We will change Japan into a country that is able to keep growing. Placing the economy as my highest priority, I will move forward steadily, step by step, on the roadmap for achieving this goal."

Gross domestic product shrank at an annualized 1.2 percent in the three months through June from the first quarter, with businesses reducing investment in a rebuff to Abe’s call for Japanese companies to deploy their record cash holdings and a surge in profits into capital spending. But with more than 70 percent of Japan’s companies not paying income tax, the government also needs more companies to become profitable.

The pledge may have helped fuel a rally in Japanese stocks on Wednesday. The Nikkei 225 Stock Average staged the steepest advance since the aftermath of the 2008 Lehman Brothers Holdings Inc. bankruptcy amid speculation a selloff that drove valuations to an 11-month low was overdone.

Abe’s administration plans to continue lowering the levy over about five years to under 30 percent. The finance ministry estimates it is currently the second highest among Group of Seven nations.

(A previous of this story was corrected with clarification from Abe’s office that part of the tax cut had already been implemented.)

For more, read this QuickTake: Abenomics

(Updates with markets in penultimate paragraph.)
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