Japanese Prime Minister Fumio Kishida. Picture: POOL VIA REUETERS/EUGENE HOSHIKO
Japanese Prime Minister Fumio Kishida. Picture: POOL VIA REUETERS/EUGENE HOSHIKO

Tokyo — Japan will deny certain tax breaks to big companies that don’t increase pay and boost deductions for those that do, as part of efforts to raise salaries in the country, a final draft of the ruling party's annual tax reform plan showed on Wednesday.

The carrot-and-stick approach underscores Prime Minister Fumio Kishida’s focus on distributing wealth to households, including by urging firms whose profits have returned to pre-pandemic levels to raise pay by 3% or more.

“I doubt the tax measures will immediately prompt Japanese firms to raise wages because they recently lifted pay [already],” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

“Still, the latest move shows the government has no choice but to intervene in private-sector wages to stoke a positive cycle of broad wage hikes and sustainable inflation in the long run.”

Since it swept to power in late 2012, the Liberal Democratic Party-led government has piled pressure on cautious Japanese firms to spend their record cash piles to boost wages. But many of them have resisted, given economic uncertainties.

Large companies that raise wages by 4% from levels a year ago will receive deductions of up to 30% from their taxable income, according to the plan obtained by Reuters.

Small firms that raise wages by 2.5% will be eligible for a tax deduction of up to 40%, the plan for next fiscal year's tax reform shows.

At the same time, companies that don’t increase pay wages won’t be able to claim tax deductions for spending on areas such as research & development, promoting investment, 5G, digital transformation and carbon neutrality.

Wage increases of 4% would be a significant hike for Japanese firms, which have offered pay rises of about 2% at annual wage negotiations in recent years with unionists.

OECD data shows Japanese wages have remained largely flat over the past 30 years, causing Japan to suffer “lost decades” and grinding deflation.

Kishida’s ruling Liberal Democratic Party and its coalition ally Komeito are expected to endorse the tax break plan later on Wednesday. The full version of the tax reform plan is expected to be approved by the parties on Friday.

The plan will form the basis for the government’s tax policy for the fiscal year beginning in April 2022. 



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