Japan promises to cut corporate tax rate, reverse deflation in 2 yrs

While unveiling its growth strategy, Japan Prime Minister Naoto Kan said fiscal reform will not be possible without a strong economy, strong public finances and a strong social security system.

He reiterated his view that doubling the 5 percent sales tax was an option to curb Japan’s massive debt, which is about twice the size of the economy. The effects of policies for boosting demand and jobs would be maximized if the public shoulders the costs of expanding social welfare, he said.

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Economists are of the opinion that Japan government should commit to raising the sales tax to 15 per cent or even 20 percent over the next 10 to 15 years to pay for rising social welfare costs and achieve growth.

The current ruling party has set aside the demand for any rise in sales tax until the next elections which are due in 2013. Even National Strategy Minister Satoshi Arai said there may not be any mention of sales tax in the fiscal plans, which are expected to be announced on June 22.

In its outlook report for 2011-12, the Bank of Japan forecast a slight rise in consumer prices and a 2 percent economic growth for the same year, higher than 1.8 percent forecast for this year.

Without setting a time-frame, Japan promised to cut its corporate tax rate, now at around 40 percent and the highest among Group of Seven (G7) countries in phases to around 25 percent that is prevalent in other major countries, to lure foreign investments and prompt companies to invest more in Japan.

Japan also plans to capitalize on fast-growing demand in Asia by focusing on infrastructure. It will consider incentives to attract overseas companies and to set up industrial zones.

According to the Organization for Economic Co-operation and Development (OECD), Italy enjoyed the lowest corporate tax rate in the G7 at 27 percent while it is at 39 percent in the U.S. as of 2009.

Japan's economic growth in the first quarter of this year outpaced that of Europe and the United States, but consumer prices declined due to poor domestic demand in April.