Asia

Japan's tax reform: this is how Tokyo wants to stimulate growth

Before the end of 2023, Japan has given the green light to a package of fiscal reforms that includes, among other measures, the setting of a limit on controversial cuts in income and residence taxes.
The governing coalition, however, remained silent regarding the timetable of tax increases planned to increase defense spending.
As explained by the Japan Times, Tokyo is trying to increase defense spending to a total of 43,000 billion yen in the five-year period between fiscal 2023 and fiscal 2027, compared to the previous five-year period of 27,400 billion yen.
The government led by Fumio Kishida will cut other areas of spending and use surplus cash and non-tax revenues, but is still expected to fall short of ¥1 trillion.
To cover the deficit, increases in corporate, income and tobacco taxes are planned.
Not only that: the executive has drawn up a plan to reduce income and residence taxes by a total value of 40,000 yen per person, based on Kishida's desire to "return" an increase in tax revenue to taxpayers who are recently struggling against rampant inflation.
An income limit will then be applied, excluding those who earn 20 million yen or more per year.
The tax cuts are expected to be implemented starting next June.
Kishida's recipe The aforementioned package also covers a wide range of tax items, including the creation of new systems to facilitate investments and support companies eager to raise wages.
Part of the new plan is designed to offer tax breaks for companies that make or sell products deemed critical to economic security and decarbonization, such as electric vehicles and semiconductors.
However, doubts remain regarding the recipe proposed by the Kishida government.
While the executive described the tax breaks as measures against rising prices, “people are concerned that the pace of their wage increases will not be able to keep up with the level of inflation for an extended period.” , explained Takahide Kiuchi, executive economist at Nomura Research Institute.
As if that weren't enough, many of those who could benefit from the cuts are concerned that the impact of the measures could be offset in the coming years by tax increases expected to increase spending to give air to some of the country's critical policies.
Kishida administration, such as Defense and Child Care.
The decisions of the Bank of Japan The Bank of Japan (BoJ) meanwhile kept the short-term interest rate unchanged at -0.1% and that of the yields on 10-year bonds at around 0%, while maintaining a higher band 1.0% for the yield on long-term government bonds.
In a quarterly outlook report, the BoJ cut its consumer price index forecast for fiscal 2024 to 2.4% from October's projection of 2.8%, reflecting a recent decline in oil prices .
For 2025, the board said it expects core inflation to reach 1.8%, slightly higher than previous estimates of 1.7%.
As for economic growth, policymakers cut GDP growth forecasts for 2023 to 1.8% from 2.0% in previous projections.
For fiscal 2024, the bank revised its GDP outlook upward from 1.0 to 1.2 percent, supported by pent-up demand.
The BoJ's growing certainty that its price projections will be achieved, the Asia Times wrote, suggests a positive outlook for the Japanese economy.
A robust economic recovery, characterized by improving indicators such as GDP growth, employment rates and consumer spending, could eventually provide a compelling reason for the central bank itself to consider raising interest rates.
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Author: A.W.M.

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