The government of Prime Minister Shinzo Abe failed Friday to reach an agreement on the contentious issue of a corporate tax cut, amid lingering skepticism about whether it would be really effective to bolster Japan's deflation-mired economy.
Abe, Finance Minister Taro Aso and economic and fiscal policy minister Akira Amari met to put the final touches to an economic package, including the corporate tax reduction, in an attempt to soften the potential impact on the economy of a planned sales tax hike to 8 percent from the current 5 percent next April.
But Amari, a proponent of a corporate tax reduction, told reporters after the meeting that the details of the package "have yet to be decided," indicating the three were not able to meet halfway over the tax matter.
Abe is eager to decrease the corporate tax rate to a level that could shore up the real economy, while Aso is opposed to an aggressive tax cut given Japan's precarious fiscal health, the worst among industrialized economies.
Amari said at a press conference earlier Friday that the government plans to end a special corporate tax surcharge introduced to finance reconstruction work in areas hit by the March 2011 earthquake and tsunami one year earlier than planned at the end of this fiscal year in March.
Scrapping the surcharge, which will reduce the current overall tax rate of about 38 percent on Tokyo-based firms by some 2 percentage points, is likely to be part of the stimulus package to be finalized by the end of this month.
Amari suggested he believes a corporate tax cut is needed to beat nearly two decades of deflation, saying at the news conference it would help create a "virtuous circle" in which growth in corporate profits leads to expansion in wages, consumption and production.
He added the government will secure necessary financial resources, trying to dispel concern that an earlier end to the three-year 10 percent surcharge on corporate taxes could negatively affect reconstruction in the disaster areas.
If realized, the scale of the de facto corporate tax cut is estimated to total around 900 billion yen, while that of tax cuts in a bid to invigorate business investment and promote wage growth is expected to be several hundreds of millions of yen, government sources said.
Aso reiterated his reluctance to cut the corporate tax rate in an aggressive manner, saying at a separate news conference earlier in the day that it is uncertain whether possible increases in corporate profits on the back of the tax measure would bring about job and wage growth.
Aiming to fend off such a question, Abe called for business and labor leaders to cooperate in boosting wages and employment on Friday, saying, "The government will consider drastic steps to create a virtuous circle (of the economy), so I hope the business and labor circles will make drastic moves."
The premier's remarks came in the government's first meeting with business and labor union leaders, including Hiromasa Yonekura, chief of the Japan Business Federation or Keidanren, and Nobuaki Koga, president of the Japanese Trade Union Confederation, known as Rengo.
It is rare for the country's political leader to directly put pressure on business leaders to raise wages for workers as this is usually determined through negotiations between management and labor.
Yonekura told reports after the meeting that a corporate tax cut would help trigger wage growth.
The effective corporate tax rate, consisting of national and local taxes, stood at about 38 percent as of January 2013, for companies based in Tokyo, higher than around 30 percent in Germany, 25 percent in China and 17 percent in Singapore, according to data released by the Finance Ministry.
Some experts say high Japanese corporate tax rates have made foreign companies unwilling to operate in the country, choking economic growth.
Abe is likely to announce on Oct. 1 whether to go ahead with the first round of a planned two-stage increase in the consumption tax to 10 percent in October 2015 aimed at raising money needed to cover swelling social security costs for Japan's aging population.
A 5 trillion yen stimulus package to prevent the tax hike from hurting the economy is also expected to be unveiled the same day.