Japan's plan to boost its ailing economy by cutting corporate taxes got a guarded welcome from business on Tuesday, but is unlikely to help restore the fortunes of unpopular Prime Minister Naoto Kan.
Kan gave orders on Monday for a 5 percentage point cut in the tax rate from the year starting next April, despite the country's ballooning debt, saying it would enable businesses to increase domestic investment, boost jobs and raise salaries.
But executives, especially in the auto and electronics industries, say their firms will still lose out to South Korean competitors unless the government provides tax breaks for research and capital investment, helps combat the strong yen and makes progress on free trade deals.
Political analysts said the tax cut would neither induce businesses to back Kan's ruling Democratic Party of Japan (DPJ), nor help raise voter support, which hit a fresh low of 21 percent in a media poll published on Tuesday.
Corporate taxes in Japan are high compared with countries around the world, so a reduction of the tax rate is a good thing, Mitsubishi Motors Corp <7211.T> President Osamu Masuko told reporters.
But in order to boost jobs and capital outlays on facilities, management needs to be able to have a bright outlook for the future, and for that a reduction in the corporate tax rate is not enough. The yen is still very strong, and for companies like ours that rely heavily on exports, it's a tough situation.
Cutting the tax rate to 35 percent from 40 percent would still leave it higher than 28 percent in Britain, 29.4 percent in Germany and 24.2 percent in South Korea, which is gaining overseas market share in cars and electronics at Japan's expense.
Many Japanese companies are more inclined to invest abroad as they try to reduce reliance on the stagnating home market, doing little to reduce the 5.1 percent jobless rate.
In the latest example, Nissan said last week it would transfer production of its Rogue light truck out of Japan in 2013, in a bid to reduce exposure to the high yen.
A Reuters survey of 217 firms conducted in November and December, found 63 percent wouldn't change domestic hiring or investment plans in response to a 5 percentage point tax cut because emerging market demand is more important than the tax rate.
Implementation of the tax plan is not guaranteed because the ruling Democratic Party needs the support of opposition parties to pass laws, due to a split parliament. The issue of how to fund the move is also yet to be resolved.
It's only halfway to the goal, said Naoki Kamiyama, an equity strategist for Deutsche Securities in Tokyo, adding that the effect on the stock market would in any case be minor.
A straightforward 5 percent reduction would have in theory translated into an 8 percent boost to the Topix index <.TOPX> of all first-section shares, but the removal of exemptions in other areas of corporate tax would mean a net tax reduction of only 1 percent and a 1 percent gain in Tokyo stocks, Kamiyama said.
Some top executives have made no secret of their dissatisfaction with the government's business policies.
I am totally disappointed. As a Japanese person I am ashamed, the president of camera and endoscope maker Olympus Corp <7733.T> told Reuters in an interview last month.
We want them to do something about corporate tax right away. It shouldn't be just a tight-fisted 5 percent, but much bigger, Tsuyoshi Kikukawa said, adding that the government should also work more closely with industry on overseas sales drives.
Fumio Ohtsubo, president of electronics giant Panasonic Corp <6752.T>, also called on the government in an interview last week to help create a level playing field for Japanese corporations, which he said suffered a range of disadvantages compared with their South Korean counterparts.
Koichi Nakano, a political science professor at Tokyo's Sophia University, said the issue would likely gain a lot of attention from big media corporations affected by the taxes.
But it is not an issue ordinary people worry about too much, he added. I don't think he (Kan) is going to get much support from the general public and business is not going to turn in favor of the DPJ either. This is not the sort of issue that propelled the DPJ to power.
(Additional reporting by Tim Kelly, Taiga Uranaka, James Topham, Chang-ran Kim and Linda Sieg; Editing by Michael Watson and Joseph Radford)