Japan Business Hails Corporate Tax Cut Plan

The tax cut is being enacted to 'encourage companies to increase investment and employment in Japan and to improve job conditions.'

Japan's top business lobby on Dec. 14 welcomed a government plan to shave five percentage points off corporate tax as "a first step" towards revitalizing the nation's fragile economy.

Prime Minister Naoto Kan said that his government planned next year to cut the tax from 40.7% to boost investment, keep companies from moving abroad, create jobs and boost wages.

He did not explain how the government would make up for the revenue shortfall at a time when it is already struggling to reduce a mountain of public debt almost twice the size of gross domestic product.

The country's top business lobby, Nippon Keidanren, welcomed the announcement, having long pushed for a reduction in the levy, which it argues is high by international standards. "We would like to sincerely salute his political decision," said Hiromasa Yonekura, chairman of the lobby, also known as the Japan Federation of Economic Organisations. "A first step has been taken toward realizing growth strategies."

But the Tokyo stock market remained cautious about the economic impact of the cut, with the benchmark Nikkei index trading in a tight range and rising just 0.22% for the day.

"The actual impact of the tax cut is still uncertain," said Masatoshi Sato, strategist at Mizuho Investors Securities. "And it is also uncertain how the government will finance the reduction."

The premier's right-hand man, Chief Cabinet Secretary Yoshito Sengoku, said that the tax cut would aim to "encourage companies to increase investment and employment in Japan and to improve job conditions".

Finance Minister Yoshihiko Noda admitted that it would be "quite tough" to secure new revenues to make up for the cut without issuing more national bonds, and only pledged that "we will do our best."

The tax cut would be a key plank of a wider tax reform package for the next fiscal year starting on April 1.

The conservative-led opposition, which controls the upper house, has threatened to block the budget and tax bill there -- but the ruling coalition, which holds the lower house, could overrule such a veto on finance bills.

The government has sought to promote Japan's fragile recovery while also cutting the industrialized world's biggest public debt, which is at around 200% of gross domestic product. The debt is a legacy of massive stimulus spending during the post-bubble economic "lost decade" of the 1990s, as well as a series of pump-priming packages to tackle the recession which began in 2008.

Japan's annualized economic growth in the July-September quarter this year was last week revised up to 4.5%. But the economic and fiscal policy minister, Banri Kaieda, said last week that he expected growth to be "substantially lower" in the fourth quarter amid signs that companies are cutting back on investment.

Japan's export-led economy has been threatened by a strong yen, which has hit 15-year-highs to the dollar in recent months, and by waning overseas demand and sluggish consumer demand at home.

Copyright Agence France-Presse, 2010

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