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Abe OK’s sales tax hike to 8%
Publication Date : 02-10-2013
Japanese Prime Minister Shinzo Abe announced Tuesday that the government will raise the consumption tax rate to 8 per cent in April as planned and unveiled a 5 trillion yen (US$5 billion) economic stimulus package designed to soften the the blow on the economy from the tax hike.
The new package includes 1 trillion yen ($1 billion) in tax breaks centering on tax cuts for capital investment. With such tax reductions, the government intends to urge companies to implement pay hikes. The ruling Liberal Democratic Party plans to set up a task force under the direct control of Abe, to launch a national drive on wage increases.
“By helping the nation regain hope, vitality and confidence that the economy will grow, we’re determined to pass a sustainable social security system to the next generation. This is the responsibility my Cabinet must fulfill,” Abe said at a press conference Tuesday evening. “By securing stable funding with the consumption tax increase, we’ll aim to strengthen the social welfare system.”
The prime minister said the nation’s economy has shown signs of recovery thanks to his “three-arrow” economic measures, dubbed Abenomics. To help the economy break free from more than 15 years of deflation, his administration has focused on putting the economic recovery on a firm footing. “Economic rehabilitation and restoration of fiscal health can be achieved simultaneously. I reached this conclusion after thinking about this matter until the very last minute,” he said. “We have no option but to achieve these two goals at the same time.”
Asked about the planned second stage of the consumption tax hike to 10 per cent in 2015, Abe said his government will make a decision after comprehensively examining economic conditions and other factors.
The announcement came after the release of new economic reports on the same day. The Bank of Japan’s closely watched Tankan survey showed that business sentiment among major manufacturers improved significantly in September, rising eight points from the previous survey to plus 12—the highest reading since the so-called Lehman shock in autumn 2008. The seasonally adjusted ratio of job openings to job seekers in August also rose to 0.95 in August, returning to the level before the Lehman shock.
Backed by such robust economic data, Abe has decided to go ahead with the sales tax increase from 5 per cent to 8 per cent on April 1, believing the nation’s economy has been on a steady recovery path. The nation’s sales tax will be raised for the second time since April 1997, and the three-percentage-point rate increase is more than the last time.
His Cabinet approved the tax increase and economic package at its meeting Tuesday evening.
The government plans to hammer out details of fresh economic measures in early December. Expenditures of the measures will be included in a supplementary budget for this fiscal year and a regular budget for fiscal 2014, which the government plans to formulate together.
The economic package says the government would swiftly start considering the reduction of the effective corporate tax rate. But this tax reduction is expected to be implemented in fiscal 2015 at the earliest.
On Monday, the LDP and its junior coalition partner New Komeito drew up a draft outline for tax system reforms. Regarding a special corporate tax introduced to raise funds for reconstruction following the 2011 Great East Japan Earthquake, the draft says the ruling parties will look into the abolition of the tax at the end of fiscal 2013—a year earlier than initially planned—on the condition that economic growth will result in wage increases. The draft also stipulates that the ruling parties intend to reach a conclusion on the matter in December after gaining sufficient understanding from people affected by the disaster. The draft’s wording has been softened apparently in consideration for Komeito which has strongly opposed the abolition.
The early abolition of the special corporate tax is estimated to reduce the total tax revenue by about 900 billion yen ($9 billion). The government intends to make up for the loss with revenue increases such as from this fiscal year’s corporate tax revenues that are expected to rise more than initially estimated.
The draft also seeks tax breaks for capital investment made through the end of fiscal 2016 as well as the relaxed criteria for current tax cuts for companies that have made pay hikes. This wage-boosting tax incentive will also be extended to the end of fiscal 2017.
Other than tax breaks, the stimulus package is aimed at speeding up disaster reconstruction, implementing projects to improve aging infrastructure such as roads and tunnels and the development of traffic and distribution networks in preparation for the 2020 Olympic and Paralympic Games in Tokyo.
The package also includes cash handouts to low-income earners to ease the negative impact of the sales tax hike. Under what it calls “a simple provision measure,” households exempt from residence tax will receive 10,000 yen to 15,000 yen per person. The number of such people totals about 24 million.
In a drive for wage hikes, LDP lawmakers plan to visit companies across the nation from later this month.
Despite Abe’s emphasis on wage growth, the economic indicators released Tuesday have also left concerns over a recovery. According to the labor ministry, wages in the nation dropped for the second straight month in August.