The Strategist

Japan to accelerate the growth of wages with the help of taxes

12/14/2017 - 11:50

Japan will pursue a policy of carrot and stick to stimulate the growth of wages. The authorities intend to provide tax benefits to companies that increase spending on wages and investment, while cutting benefits for firms that do not, Bloomberg writes.

Companies that raise salaries of their employees by at least 3% a year or invest in human capital through the training of workers, will be able to reduce their income tax, according to the documents of the ruling coalition that were at Bloomberg News' disposal. It is noted that the changes will come into force in the period from 2018 to 2020 fiscal year. For some small and medium-sized companies, tax cuts can be reduced to 20%.

Firms that do not invest or do not raise the salaries, will no longer be able to use existing benefits, such as benefits for research and development, to reduce their tax burden.

It is expected that the ruling coalition will make the changes public before sending them to the Cabinet for official approval. Then the document will be approved by the parliament, where the coalition has a majority in both houses. Voting is likely to take place before the start of the new fiscal year, that is, before April 1, 2018.

The changes should increase investment and bonuses, but this is only a temporary measure, which is unlikely to lead to a steady increase in basic wages, said SMC Nikko Securities senior analyst. According to him, reducing the corporate tax rate would be a more effective measure.

Changes will also affect the tax on personal income. People earning more than 8.5 million yen ($ 75,000) will see their tax burden increase from January 2020 due to a decrease in the principal deduction. Politicians tend to avoid increasing the tax burden on households that raise children or care for elderly relatives.

People who do not work for companies, such as freelancers or business owners, will get some benefit, as their standard deduction will be slightly increased.

As reported earlier, Japan's GDP in the III quarter increased by 2.5% compared to the same period last year.

The economy of Japan has been growing for the seventh consecutive quarter, demonstrating the longest growth since the mid-1990s.

However, inflation in the country remains below the target set by the Bank of Japan at 2%. One reason is that the tightening of the labor market has not led to a strong increase in wages, and households are keeping a tight control over their spending.

While export growth stimulates corporate profits and business investment, wage and consumer spending growth remains slow. Private consumption in July-September decreased by 0.5%.


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