Japan’s tax reform: here’s how Tokyo wants to stimulate growth


6 February 2024 - 13:00

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Japan gave the green light to a fiscal reform package that includes, among other measures, capping controversial income and residence tax cuts.

Japan's tax reform: here's how Tokyo wants to stimulate growth

Before the end of 2023, Japan gave the green light to a package of tax reforms which includes, among other measures, setting a limit on the controversial cuts in income and residence taxes. The governing coalition, however, remained silent regarding the timetable of tax increases planned to increase defense spending.

As the Japan Times explained, Tokyo is trying to increase defense spending to a total of 43 trillion yen in the five years between fiscal 2023 and fiscal 2027. In the previous five-year period, the defense spending was 27,400 billion yen. The government led by Fumio Kishida will cut other areas of spending and use surplus cash and non-tax revenues but is still expected to fall short of 1 trillion yen.

To cover the deficit, increases in corporate, income and tobacco taxes are planned. Not only that: the executive has developed a plan to reduce income and residence taxes for a total value of 40,000 yen per person, based on Kishida’s desire to "return" an increase in tax revenue to taxpayers who recently they are struggling with rampant inflation. An income limit will then be applied, excluding those who earn 20 million yen or more per year. The tax cuts are expected to be implemented starting next June.

Kishida’s recipe

The aforementioned package also covers a wide range of tax items, including the creation of new systems to facilitate investments and support companies eager to raise wages. Part of the new plan is designed to offer tax breaks for companies that make or sell products deemed critical to economic security and decarbonization, such as electric vehicles and semiconductors.

However, doubts remain regarding the recipe proposed by the Kishida government. While the executive described the tax breaks as measures against rising prices, “people are concerned that the pace of their wage increases will not be able to keep up with the level of inflation for an extended period.”, explained Takahide Kiuchi, executive economist at Nomura Research Institute.

As if that weren’t enough, many of those who could benefit from the cuts are worried about whether the impact of the measures could be offset, in the coming years, by tax increases expected to increase spending to give oxygen to some of the critical policies of the Kishida administration, such as Defense and Child Care.

The decisions of the Bank of Japan

The Bank of Japan (BoJ) meanwhile kept interest rates negative at -0.1%, while bringing the 10-year bond yields at around 0% and maintaining a 1.0% upper band for long-term government bond yields.

In a quarterly outlook report, the BoJ cut its consumer price index forecast for fiscal 2024 to 2.4% from October’s projection of 2.8%, reflecting a recent decline in oil prices. For 2025, the board said it expects core inflation to reach 1.8%, slightly higher than previous estimates of 1.7%. As for economic growth, policymakers cut GDP growth forecasts for 2023 to 1.8% from 2.0% in previous projections.

For fiscal 2024, the bank revised its GDP outlook upward from 1.0 to 1.2 percent, supported by pent-up demand. The BoJ’s growing certainty that its price projections will be achieved, the Asia Times wrote, suggests a positive outlook for the Japanese economy. A robust economic recovery, characterized by improving indicators such as GDP growth, employment rates, and consumer spending, could eventually provide a compelling reason for the central bank itself to consider raising interest rates.

Original article published on Money.it Italy 2024-02-03 07:37:00. Original title: La riforma fiscale del Giappone: così Tokyo vuole stimolare la crescita


# Asia
# Japan

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