The decision by the government to cut the corporate tax rate was a clear reflection of its fear that the country is losing its attractiveness as a destination for investment.
Prime Minister Naoto Kan expressed his hope that the tax cut, which needs some final arranging before its implementation, will help boost the economy by encouraging companies to increase their business investment and employment in the country, bucking the trend of their shifting production bases abroad.
The relatively high cost of doing business in Japan has long been noted and this negative image has been reinforced recently by many others factors, notably the strength of the yen to the dollar and other major currencies, which makes it more appealing to domestic companies to build factories overseas and hire cheaper labor there.
“More companies going abroad and the jobs being lost will never be positive for the Japanese economy, or for those seeking jobs,” Kan told reporters Monday after ordering his key ministers to enable a 5 percentage point cut in the effective rate on corporate income tax, which currently stands at around 40 percent.
The rate has long been higher than the global average of 25 to 30 percent and is believed to have undermined Japanese firms’ appetite for fresh capital spending.
Leading manufacturers, including Nissan Motor Co., Sharp Corp. and Fujitsu Ltd., have moved production and development facilities to other countries, such as Thailand, China and Singapore, where tax breaks are available for certain projects.
Not only some Japanese firms but foreign companies also have apparently given up on the Japanese market. Finland’s Nokia Corp., the world’s biggest mobile phone maker, moved its development base from Tokyo to Singapore in 2009, while Novartis Pharma K.K. of Switzerland closed its research office in Ibaraki Prefecture in 2008.
But reactions from some quarters to Kan’s decision have been muted.
“The tax cut could lead to more spending and employment by companies, but the impact will be limited,” said Akihiro Morishige, an analyst at Mitsubishi Research Institute. “The level of tax will remain high even after the 5-point cut.”
Morishige also said the current uncertainty over Japan’s economic outlook will continue to weigh on business sentiment. “It is unlikely that companies will spend or hire more without a recovery in domestic demand,” he said.
Another problematic aspect is that Kan will have to secure enough financial resources to compensate for the revenue shortfall as a result of the tax cut.
The government has pledged to cut expenses whenever implementing policies that require additional public spending, in an attempt to restore Japan’s fiscal health, the worst among major developed countries.
Kan’s proposed 5-point cut in the tax had been sought by business leaders, who hailed the government’s decision.
“Amid tough fiscal conditions, the government has made great efforts,” said Hiromasa Yonekura, chairman of the Japan Business Federation (Nippon Keidanren).
Masamichi Adachi, a senior economist at JPMorgan Securities Japan Co., said Kan’s decision was a “net positive.”
But he doubted the tax cut would immediately bolster business investment or economic growth. “Japanese firms have abundant retained earnings, so it is not that they have not spent money because they don’t have it,” Adachi said, adding companies will again loosen their purse strings only when the economy starts to recover.
But he added: “It is a positive thing that the leaders of a county prove they are not hostile to business. In this sense, Mr. Kan has shown that his government is keeping its door open.”