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Politics

Abe sees China's 5G lead as 'economic security' threat

Prime minister personally lobbies for bigger tax breaks

The Japanese parliament building in central Tokyo: Sensing Prime Minister Shinzo Abe's conviction, the ruling party agreed to broaden tax breaks for 5G investment to 15%. (Photo by Uichiro Kasai)

TOKYO -- When Japan's tax guru Akira Amari phoned Prime Minister Shinzo Abe on Monday to inform him that the ruling party's powerful tax research commission had agreed to offer a generous 9% tax break to telecommunications companies investing in 5G infrastructure, the leader was not impressed.

"Nine percent is not enough," Abe told his close aide.  "I want you to revisit the issue not just as a tax problem, but from the perspective of economic national security."

The party and government eventually agreed to bump up the tax break to 15%.

It was a window into just how much the Japanese leader is concerned about China's rapid advances in the field and how he sees it as a threat to the nation's security as well as its economic prospects.

By encouraging companies to use only "trusted" telecommunications equipment, Abe hopes to both prevent Chinese companies from dominating Japan's next-generation networks and to help Japanese players expand market share.

Akira Amari, the head of the ruling party's tax research commission, left, talks with Japanese Prime Minister Shinzo Abe. Amari aggressively lobbied tax panel members to endorse a 15% tax break for 5G investment.

5G connections "will have a significant impact on all aspects of society, including national security," Abe told reporters Monday. He believed that a hefty tax break is necessary to prevent cheap Chinese products from flooding Japan's network starting next year.

"We need to plan 100 years into the future," he said.

Amari also sees national security and the economy as intertwined, especially as the U.S.-China rivalry extends into high-tech fields. But when he first became head of the Liberal Democratic Party's tax research commission, its other members were unconvinced. "A program that hands out money to big mobile carriers boasting a profit is no good," said one member. 

Even after the rest of the members agreed to creating such a tax break category, they insisted on the usual 5%. The figure went up to 9% only after Amari's aggressive lobbying.

"Good job," Abe told Amari when the latter visited the Prime Minister's Office on Wednesday to report about the 15% decision. 

Equipment costs directly affect a company's ability to compete in 5G networks. Huawei Technologies offers 5G products that are about 30% cheaper than Japanese alternatives. Ericsson and Nokia's are 10% to 20% cheaper.

The tax break only applies when using equipment from countries deemed not to pose a security risk to Japan. A 9% break is not enough to cover the price gap between Chinese products and Japanese or Western products, which are considered more secure. Abe was hoping for at least 10% to 15%.

At the heart of his concerns lies Japan's limited market share on 5G equipment. Huawei controls 30.9% of the global market for base stations, followed by Ericsson with 27% and Nokia with 21.9%, according to data released to a cabinet economic council at the end of October. Japan's NEC and Fujitsu each had a share of at most 1%.

The new tax break could encourage Japanese telecom providers to seek out domestic products they know to be secure, which in turn could help their manufacturers expand their global market share.

After the Monday phone conversation with Abe, Amari went back to officials at the finance and economy ministries, urging them to reconsider. The tide turned once the LDP tax commission understood Abe's firm conviction, and a broad agreement for a 15% tax cut was reached on Tuesday.

Abe on Monday also decided to set up an economic team within the National Security Secretariat next spring.

"Our direction on 5G and telecommunications, including on security concerns, is a message to the international community," he said Wednesday.

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