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Japan dangles corporate tax cuts to spur investment, pay raises

But latest Abenomics measures weak on boosting potential growth

Japan should lead the productivity revolution, Prime Minister Shinzo Abe said.

TOKYO -- Japan promises to create a productivity revolution by cutting taxes on businesses that increase pay and invest in technologies, but the country remains reluctant to go deeper with deregulation that could help unleash innovation. 

The cabinet signed off Friday on a new economic package that touts the twin goals of boosting productivity and developing human capital. The document also includes telecommunications-sector deregulation to change how spectrum is allocated, as well as free early childhood education for all income levels. But overall, the measures seem focused more on wealth redistribution and lack punch in lifting the potential growth rate.

Feeling productive

"We will employ all policy tools, including the tax system, the budget and regulatory reform, so that our country leads in the productivity revolution," Prime Minister Shinzo Abe said at a government-ruling coalition policy consultation.

To help lift productivity, the effective corporate tax rate would plunge to 25% for companies that raise pay by 3% or more. Those that also invest in the latest technologies, such as the so-called internet of things, would get an even lower 20%. The aim is to fuel a virtuous economic cycle by strengthening the competitiveness of enterprises that actively spend their earnings.

The package also takes a knife to a rock bed of telecom regulations. Price competition would be introduced in spectrum allocation. By revamping the existing process of having the Ministry of Internal Affairs and Communications review business plans and award licenses, the government aims to boost transparency.

By smoothing the way for market newcomers, the government seeks to help lower service charges and facilitate the development of new technologies to work with 5G ultrahigh-speed data service.

Subsidizing failure

Some proposals have drawn mixed reaction. The government seeks to increase subsidies to the manufacturing, commerce and service sectors as a way of encouraging investment by small and midsize businesses. But amid broad pessimism over the economic outlook, what is needed more would seem to be steps to make Japan more business-friendly via deregulation. Listed companies here expect annual real economic growth of just 1% over the next five years, according to the Cabinet Office.

For development of human capital, the package includes plans to make early childhood education free. "Abenomics' focus is shifting more toward wealth redistribution," Dai-ichi Life Research Institute economist Takuya Hoshino pointed out. This contrasts sharply with the three arrows of monetary easing, fiscal spending and growth strategy touted under Abenomics when Abe began his second stint as prime minister in 2012.

Past Abenomics policies appear to be producing results as deflationary pressure eases. But as the country moves toward six straight years of growth -- nearly double the average streak seen in postwar Japan -- its core economic strength will not improve without accelerated efforts to reform regulations.

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