Japan plans company tax breaks to achieve economic security, wage growth
TOKYO (Kyodo) -- The government is considering offering tax breaks for companies that invest in strategically important sectors such as semiconductors and storage batteries, in a push to boost Japan's growth potential and ensure economic security, according to an outline unveiled Wednesday.
Additionally, the government is considering expanding tax reduction measures for small and midsize companies that have lagged behind larger firms in raising pay, which would be in line with Prime Minister Fumio Kishida's drive to increase wealth redistribution.
Ideas:
Every country is trying to find sectors or niches where they can create growth for the economy. For Japan and semiconductors, it might take some time to gain market share as Taiwan, South Korea, and China seem to far ahead of Japan.
Tax reductions for small and midsize companies seems long overdue as maybe they don't have the resources or the kind of profit margins to give wage increases.
Some 70 percent of Japanese wage earners don't work in large companies but in small and midsize companies.
For many years, many large companies in Japan just sat on large sums of money and so they could easily afford to give wage increases, but mostly likely small and midsize companies have had their profit margins severely limited due to inflation in Japan.
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The envisaged changes are part of efforts to support the economy by mitigating the effects of rising inflation on households through promoting wage hikes and increased investment. They will be included in a new economic package due to be compiled in October.
The creation of a new scheme offering tax breaks on corporate profits from intellectual property, such as patents, has also been floated amid hopes that it would encourage companies to increase investment in research and development, as well as in intangible assets.
Ideas:
The Bank of Japan and for example the US Federal Reserve, try to mitigate the effects of inflation by increasing the key interest rate. But in this case, the Bank of Japan, has not increased the rate, and has used the strategy of letting inflation run its course and be natural, with limited interventions.
As a result trying to increase wages might be a sound strategy to offset the effects of inflation on households.
Increasing investments is a tricky situation and companies are not going to invest unless they see and feel the economy is on the right track and progressing.
Again, companies are not going to increase investments unless they can see and feel some real incentives and maybe tax breaks might be enough for some companies to begin to invest in research and development.
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"We will transform the economy into a growth-oriented one, led by sustained wage growth and active investment," Kishida told a government panel during a meeting, when the outline was presented.
Details will be worked out toward the end of the year, as the ruling parties are to debate how to reform the country's taxation system.
Ideas:
Every succeeding Japanese government has come up with plans to grow the economy, but without much success. For late Prime Minister Abe, had similar plans, and for a while, they seemed to work..
The Japanese government, like many governments, are always good with plans, but they sometimes are not very clear in the end as competing political interests always get in the way of what was initially intended.
The Japanese government can't force companies to give wage increases but they can give incentives through tax breaks and other forms of incentives that might get some companies to increase wages.
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Kishida on Monday instructed Cabinet ministers to use "all possible tools" in putting together the economic package. Tax breaks are considered among the major instruments that could be utilized to aid the private sector at a time when increasing capital spending is seen as crucial.
The plan to promote corporate investment comes after parts shortages during the COVID-19 pandemic prompted a review of existing supply chains, with advanced economies growing increasingly concerned that overreliance on China could pose a threat to economic security. Automakers have suffered cuts in output due to difficulties in securing necessary components, such as semiconductors.
Ideas:
Capital spending is not going to increase, or at least not in large amounts, until companies can see and feel the economy is growing. Even if the Japanese government gave incentives, such as tax breaks for capital spending, some companies might not spend.
Supply chains, in Japan and globally, are now a very strategic step in doing business, and with the covid situation causing major disruptions in the supply chains, all countries are not reviewing their supply chain operations to ensure what happened during the pandemic won't happen again.
At the same time, many countries such as Japan and South Korea, are looking at being over reliant on China and doing business in and with China.
Such as the auto industry suffered through many component shortages, some related to China and its supply chain operations and some related to other Asia countries.
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The government is seeking to revitalize the country's chip sector after competitors from China and South Korea overtook Japan's top semiconductor companies.
The government has already decided to provide financial assistance to Taiwan Semiconductor Manufacturing Co. and Japanese chipmaker Rapidus Corp. for building production plants in Japan. The envisaged tax breaks for strategically important companies are aimed at lowering the bar for firms to construct plants in the country.
Ideas:
Japan, for whatever reason, has fallen way behind Taiwan and South Korea in the semiconductor market. It might take decades for Japan to regain any kind of market share.
At the same time, Japan has excellent relations with Taiwan and setting up partnerships between Taiwanese companies and Japanese companies and even between both governments seems like a logical step to grow Japanese semiconductor sector.
Japan is way behind other countries in providing tax breaks to set up and do business in Japan, as for example, Hong Kong, in past years, Vietnam, and Singapore have been more tax friendly for international companies doing business in their respective countries.
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Constructing an advanced chip factory requires a hefty initial investment to get it up and running, while profitability is always uncertain. Nonetheless, the measures are expected to create spill-over effects for local economies and create jobs.
Besides the envisaged tax breaks, the government will decide on how much fiscal spending should be allocated to fund the economic package, whose total size has yet to be determined. A supplementary budget will be formed for the current fiscal year until next March.
Ideas:
Setting up and constructing advances chip factories might take one or two years to complete and may take another year or two for it to up and running completely. So its going to take some time for the Japanese chip sector to get back to where it can compete with South Korea and eve Taiwan.
Spill-over effects are important for any geographic area and especially in Japan, where much of the population has become and age population. Putting chip factories in areas where the local population doesn't need to move to Tokyo, Osaka, or Nagoya is a smart move.
Again, governments have good intentions, but after all of the political negotiations are completed, in this case, the intended economic package might not be what was originally intended.
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Inflation relief for consumers will be one of the pillars of the new package.
While Kishida has called for robust pay hikes above the inflation rate, real wages have continued to decline, despite annual wage negotiations between labor unions and management for fiscal 2023 resulting in the sharpest average pay hike in three decades.
Ideas:
It must be remembered that the wage increases were in large companies and only a few small and midsize companies, as 70 percent of Japanese wage earners don't work for large companies.
Real wages, even with wage increases of 3.5 percent on average, is still below the inflation rate of 4.2 percent in Japan. And again, some 70 percent of wage earners didn't Japan didn't get a wage increases with means the 4.2 percent inflation rate has been wage values even less.
Yes, the 3.5 percent wage increases were the largest in three decades, which seems like a wage increase at all considering how inflation has continued to increase each month or quarter in the last few years in Japan.
Article:
As smaller firms face difficulties coping with labor shortages and raising employees' pay, the government is considering providing subsidies to those investing in labor-saving technologies, according to the plan.
Japan's labor market conditions remain tight, partly due to an aging society, which economists say should support wage growth. The government wants to make it easier for workers to reskill and change jobs and plans to boost the minimum hourly wage to 1,500 yen ($10) by the mid-2030s from the current level of around 1,000 yen.
Ideas:
Small and midsize companies are the most important part of any country and economy as they provide the most jobs in an economy. Large companies might get all the news but its the small and midsize companies that really run the economy.
Recently, or maybe for decades, small and midsize companies have had to deal with thin profits margins, and with inflation causing all kinds of challenges in Japan the last few years, their profit margins have grown even thinner.
As a result many small and midsize companies have little or no room for wage increases for their workers.
And at the same time, labor-saving technologies cost money but providing subsidies might help some small and midsize companies transition.
Japan need to increase the retirement age from 65 and 70 to unlimited meaning allowing older Japanese workers to who want to continue working to continue work. They might for example after age 65 not have regular wage increase as a way to keep companies from having too many wage earners at the same time.
Reskilling is good and needed in Japan, in Japan, for example, has one of the lowest productivity rates in among advances economies.
But its going to take some time to re-train workers for news skill and its going to take money to retrain workers.
Changing jobs should be a given liberty in any country and the more more flexible an economy is more chances it can grow and workers will gravitate to jobs they want and need and not be stuck in a job they don't like or want.
The minimum wage situation has both positives and for example, in South Korea, the government implement several yearly minimum wage increases but what happened is many small companies laid-off part-time workers, decreased their part-time hours, and implemented labor saving strategies such kiosks in convience stores and restaurants.
Yes, minimum wage increases is good for those working part-time and contract-type jobs but its also not good as many companies might not be prepared to have mandatory wage increases.
Have a nice day and be safe!
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