Japan's Koizumi Swings Behind Corporate Tax Cuts

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

30 July 2002

Taking advantage of a rebound in his popularity, Japan's prime minister, Junichiro Koizumi, who had seemingly lapsed into the fiscal paralysis that has vitiated all previous attempts to reform Japan's tax system, has called for aggressive tax cuts of more than Y1,000bn ($5.5bn) to kick-start Japan's moribund economy.

Reversing his recent cautious stance, Mr Koizumi has asked the advisory Council of Economic and Fiscal Policy (CEFP) to make proposals for corporate tax cuts for the next fiscal year beginning in April 2003. He also said that he would not insist on maintaining the Y30,000bn ceiling on new government bond issuance, previously a corner-stone of his fiscal policy.

Despair at the awful prospects for the Japanese economy has driven the Nikkei stock market index down to 9,591. It used to be said that the Japanese banking system would collapse if the Nikkei fell below 15,000, so banking reforms have perhaps been more effective than many international commentators are usually prepared to admit. But the government still evidently feels it has to be seen to do something as the economy slides into chaos.

Mr Koizumi said that any tax cuts would eventually have to be revenue neutral, but in another policy reversal he said that substantial tax cuts could come before any spending cuts, as long as there was a return to revenue neutrality within three years.

The CEFP itself has recently been calling for a cut of at least 5% in the effective rate of corporate tax, currently running at a high 41%; but stiff resistance is expected from the finance ministry. Finance Minister Masajuro Shiokawa prefers targeted tax incentives to stimulate investment in research and development and information technology. The ruling party the LDP is also far from united behind the prime minister.

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