Japan Steels Itself For Tax Cuts

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

30 September 2002

Faced with a rocky international economic situation, a collapsing banking sector, threats from Standard & Poor's to downgrade its debt still further, and sullen consumers who won't spend money, the Japanese government is stiffening itself to take dramatic action to improve matters.

Enmeshed in Japan's arthritic decision-making process, Ministers seem to have been talking about tax cuts for so long that the subject now just elicits yawns; but there are signs of movement. Economics Minister Heizo Takenaka said last week about the cuts that "Given the situation in global markets and Japanese markets, we want to make those steps larger, faster and easier to understand for the markets."

Mr Takenaka said he wanted to see a tax cut of two trillion yen (about US$18bn) to three trillion yen in the financial year starting in April. "Because the world economy is still very fragile and it is required for the government sector to provide some kind of tax cuts to stimulate the supply side and . . . the demand side," he said.

Mr Takenaka said a permanent reduction in corporate tax was the best way to strengthen the supply side of the economy, while tax breaks for investment or research and development should be combined to help raise demand, echoing the advice given by President George Bush's chief economic advisor, Robert Hubbard in a meeting with Finance Minister, Masajuro Shiokawa.

The need to bail out the banking sector may however limit the availability of tax cuts, if taxpayers end up footing the bill for the bombed-out banks. "Public funds . . . and, if needed, even nationalisation should be considered," said Prime Minister Junichiro Koizumi last week. But the game is far from over: the media reported at the end of the week that Financial Services Minister Hakuo Yanagisawa, who maintains that the banks are adequately capitalised and fiercely opposes the use of public funds, wanted to resign.

Also last week Standard and Poor's threatened to further downgrade Japan's sovereign debt rating if progress is not made on reforms. "If there is no substantial improvement in terms of the structural reform . . . it is most likely we are going to downgrade within a two to three years' time horizon," Asia-Pacific director at the global risk evaluator Takahira Ogawa said on Thursday. Japan's sovereign debt rating of AA-minus with a negative outlook is already the lowest among the Group of Seven industrialised nations.

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