Prime Minister Fumio Kishida is following last month’s record economic stimulus package with a move to boost worker pay as part of his campaign to revamp Japanese capitalism so prosperity is shared more widely and growth is more sustainable.

The ruling party on Friday is set to unveil a set of carrots and sticks that use the tax code to try to coax businesses into raising worker pay and punish those that don’t.

The promised tax breaks are roughly 50% more generous than ones already on the books, according to a draft of the Liberal Democratic Party’s tax plan for fiscal 2022 seen by Bloomberg.

Pushing up worker pay that has languished for years won’t be easy, though, especially given that Japan’s economy has lagged other developed nations in recovering from the pandemic.

Success could help growth take firmer hold, while failure could contribute to the new prime minister joining a long list of the country’s revolving-door leaders, especially if he also struggles to keep COVID-19 under firm control. Kishida faces an Upper House election in the summer.

Economists say the tax measures are a good start, but not sufficient because the faster growth that’s long eluded Japan is a tough chicken-and-egg problem. The economy has shrunk in five of the last eight quarters, with growth next year forecast to be the slowest among the Group of Seven nations.

“Unless it comes with policies to raise productivity and shift industrial structures, I don’t think it’ll function well,” said economist Yusuke Inoue at Marubeni Research Institute, referring to the tax plan. “Companies that don’t have money can’t raise wages.”

Kishida has made boosting middle-class incomes a centerpiece of his agenda, promising higher pay for public employees such as nurses and caregivers, and calling on companies to give workers a raise exceeding 3% at labor negotiations traditionally held in the spring.

This is the level of gains he’s looking for to give a cycle of wages, prices and growth a renewed push. Japan’s key inflation gauge is still barely above zero even after eight years of massive Bank of Japan stimulus measures and with input costs shooting up at the fastest pace in four decades.

For its part, the nation’s biggest business lobby, Keidanren, appears to be rebuffing Kishida’s call. The group is counseling firms whose profitability has yet to recover to focus on maintaining employment. Lower pay in exchange for job security has been a trade-off in Japan for years.

With a key measure of costs for Japanese companies jumping to the highest level in decades amid spiking commodity markets and global supply chain issues, many businesses don’t have breathing room to consider wage increases, according to economist Harumi Taguchi at IHS Markit.

“Large companies and those with future cash flow will to some extent strengthen their efforts to boost paychecks,” she said. “But I think a 3% jump overall will be very difficult to achieve.”

Japan has had tax breaks for firms that raise wages since 2013, but they didn’t result in the kind of wage gains that former Prime Minister Shinzo Abe pushed in his Abenomics plan.

As of 2019, only around 130,000 firms, or about 3%, were using the existing program, according to the most recent data from the Finance Ministry. Total tax deductions came to the equivalent of about ¥227 billion, a pittance for the world’s third largest economy.

Kishida is trying to break the impasse by doubling down on the incentives and adding some consequences for firms that don’t play along, the draft of the LDP’s tax plan showed.

Big companies that raise pay by 4% and boost investment in worker training will be able to cut their corporate tax liability by 30%. The current deduction maxes out at 20%.

For smaller firms, the maximum deduction will rise to 40% from 25%, with the bar on the required raises kept at 2.5%.

Large businesses that fail to raise pay by even 1% or don’t make sizable enough investments in new equipment will be ineligible for some tax breaks on capital spending. The pay requirement phases in over two years.

“The important thing is to make sure that any wage rises will be continuous, rather than a one-shot move,” Finance Minister Shunichi Suzuki told reporters Friday. “We’ll need to carefully follow up on moves on wages going forward.”

The Japanese Trade Union Confederation, the country’s biggest worker cooperative, questions whether the new tax incentives will succeed where the old ones failed.

“Isn’t it better for the government to actually collect the taxes and invest in training for new industries and invest in people?” a spokesperson for the union, known as Rengo, wrote in an email. “We still need to assess the effectiveness of the existing tax breaks.”

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.