Japan Appoints Tax Cutting Prime Minister

by Mary Swire, Tax-News.com, Hong Kong

25 September 2008

Japan's ruling Liberal Democratic Party has chosen Taro Aso to replace Yasuo Fukuda as the new party leader and Prime Minister, signaling that the government is ready to bring about a long awaited cut in corporate tax and other stimulus measures to revive the Japanese economy.

The 68-year-old former Olympic marksman and current foreign affairs minister, was chosen by two-thirds of the party on Monday, comfortably beating his nearest rival finance minster Kaoru Yosano who managed to garner only 66 votes against Aso's 351. He was due to be installed as Prime Minister on Wednesday.

Japanese policy makers have been wrestling for some considerable time with the government's fiscal problems. They have pledged to balance the books by 2011, whilst also paying down Japan's mountain of debt, which is by far the highest among the main trading nations. However, with the country once again flirting with recession, it seems that Aso's more expansionist vision of increased spending or tax cuts struck a sweeter chord with the party faithful than Yosano's more cautious fiscal approach.

Analysts have for a long time pointed to Japan's rate of corporate tax, which stands at an effective rate of more than 40% - also the highest among the major industrialised nations - as the major barrier to investment and economic growth, but as its fiscal concerns mounted, the government has been reluctant to lower tax rates.

Reports suggest however, the Aso is keen to cut corporate tax, possibly by as much as 10% to about 30%, to spur the business sector. He is also thought to be keen on other investment-boosting measures, such as accelerating depreciation rates to encourage businesses to investment more in plant and machinery.

Aso is also known to be an opponent of raising Japan's rate of consumption tax, and has argued in the past that such a measure would merely depress consumer spending at a time when Japan is trying to achieve the exact opposite.

Consumption tax is currently at 5% and well below the equivalent consumption tax rates in Japan's economic rivals in places such as Europe. The government's tax advisers have suggested that this must rise to about 10% to help bring in the tax revenues needed for the government to meet its fiscal objectives. However, the issue is very politically sensitive, and a previous increase in the tax, from 3% to 5%, has been widely blamed for tipping Japan into recession some years ago.

But, while Aso's election is being seen as a victory for the tax cutters, the Prime Minister's office has come to resemble something of a revolving door in recent years, and it remains to be seen whether Aso will be around for long enough to see through his preferred policies.

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