REPEAT:ANALYSIS:Japan Tax Change Unlikely to Spur Capex, Wages

By Max Sato

     TOKYO (MNI) - The Japanese government's tax reform plan is unlikely to be

successful in boosting business investment or wage hikes as intended and won't

have any benefit at all for the growing number low-income earners in the

country.

     Pending parliamentary approval, the ruling coalition plans to give tax

credits to firms that increase capital investment or raise wages in its fiscal

package for fiscal 2018 onward.

     Prime Minister Shinzo Abe is hoping to take credit for wage hikes through

government-brokered annual labor-management talks but many firms are cautious

about raising fixed labor costs, resulting in a slow wage increase and thus

lackluster consumer spending.

     --SMALL BASE WAGE GAIN

     "The government hasn't made sufficient efforts to set a standard, such as

guiding companies to spend a certain percentage of their profits on wage hikes,"

said Kenji Yumoto, chief senior economist at the Japan Research Institute.

     In response to a government request, the Keidanren business lobby is

calling on its members to raise wages by an average 3% in the next fiscal year

starting in April, but that includes automatic seniority increases and temporary

bonuses.

     Base wages -- the main part of fixed labor costs -- are likely to post

another small increase from the current fiscal year. They rose an average 0.48%

in 2017 following a 0.31% rise in the previous year

     Companies set base wage hikes based on the previous calendar year's average

inflation rate, not the inflation outlook. Labor unions, too, demand pay

increases based on the same data. The core CPI is picking up only slowly, up

0.43% on average in the first 10 months of 2017, though this is above the

average of -0.1% in 2016.

     In their quest to achieve a stable 2% inflation rate, government and

central bank policymakers are urging businesses and households be more

optimistic about growth prospects and increase their spending and investments.

     "But the Bank of Japan has been wrong in forecasting inflation and keeps

pushing back the timeframe for hitting its target," Yumoto said. "The private

sector cannot trust them when they are asked to be more forward-looking."

     Some large firms may be able to raise wages by 3% but small businesses

cannot afford to do so, even with the new tax credit.

     "Companies will set wages by looking at their performances and their need

for securing employees amid labor shortages," said Mitsubishi UFJ Research and

Consulting economist Shinichiro Kobayashi. "They will not raise wages because of

a temporary tax credit."

     "The same goes for capex. If companies need to invest more, they will do so

by using their cash flow or borrowing money," Kobayashi said.

     --HIGH EARNER TAX HIKE 

     The government also plans to raise net income tax revenues by about Y90

billion by increasing levies on salaried workers and lowering the tax burden for

the increasing number of freelance and contract workers. It is part of the

government efforts to improve the work-life balance.

     On the one hand, it will raise taxable income deductions for all taxpayers

by Y100,000 to Y480,000 a year. This would cut taxes for freelancers and other

non-regular workers, too.

     On the other hand, salaried workers earning over Y8.5 million annually

(about 4% of taxpayers) will face higher income taxes from January 2020, except

for those who are raising children or providing care to family members.

     But critics point out that there is no new fiscal support to people whose

income is too low to pay taxes. Japan's poverty rate was 15.6% in 2015, above

the average of other major economies.

     "The tax reform plan is not going to have a net positive impact on the

Japanese economy," Kobayashi argued. "There is a cumulative effect of rising

social security costs and taxes on households. They will restrict spending on

big-ticket items, including cars, if their income tax burden rises."

     The economy is expected to see a rush of consumer spending ahead of the

scheduled rise in the national sales 10% from 8% in October 2019 and a sharp

pull back in demand after the new tax takes effect.

     But until then the economy is forecast to continue recovering at a modest

pace, remaining not too hot and not too cold.

     Japanese exports are expected to support GDP growth of around the economy's

1% growth potential, led by solid demand for automobiles, electronic devices,

general machinery and chemical products.

     "However, exports are unlikely to be as strong as they have been this year.

Manufacturers are facing production capacities constraints. Even if there's

demand, their supply will not catch up," Kobayashi said, noting automakers have

increased their production capabilities overseas.