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Repeats Story Initially Transmitted at 08:56 GMT Dec 15/03:56 EST Dec 15
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.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com
--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com